Reverse mortgages can be very useful for certain clients in that they allow homeowners to tap into their home equity without selling their home even if they don’t have the income to qualify for refinancing. For clients who may be interested in applying for Medi-Cal to assist with nursing home expenses it is important to understand how a reverse mortgage can affect eligibility.
Lines of Credit: If the reverse mortgage is set up as a line of credit, once the line of credit is drawn down, the cash will be counted as a loan requiring repayment and included in the property reserve, i.e., counted as part of the assets. However, most lines of credit are drawn down for a specific purpose – to repair a roof, for example – and are spent down at the same time they are drawn down and therefore do not count as assets. Lines of credit, if not drawn down, are not included in the property reserve and therefore do not count as countable assets.
Annuities and Other Lump Sums/Stream of Payments:
Some promoters of reverse mortgages will advise that a lump sum equity loan be used to purchase an immediate annuity or even that a reverse mortgage be used to fund an annuity. Not only are the periodic proceeds from these annuities counted as income and included in the share of cost, but annuities purchased on or after September 1, 2004 are subject to estate recovery.
With a reverse annuity mortgage (RAM) the reverse mortgage lender purchases an annuity to fund a stream of payments to the borrower from the equity in the home, then the payments to the borrower are treated as income in the month received, because they are annuity payments. If the annuity is owned by the lender it is not subject to the state’s annuity rules. However, if the borrower purchases the annuity, then it is also treated as income in the month received, but must meet the state’s annuity rules and it will be subject to the recovery provisions. Income generated through the use of home equity will create state and federal tax obligations. California law prohibits lenders from requiring a borrower to purchase an annuity as a condition of obtaining a reverse mortgage loan.
Reverse mortgages may also be made in a stream of income from the lender directly to the borrower or the payment may be in the form of a lump sum payment. In either case, since an annuity has not been purchased, these payments would be considered property, as opposed to income, in the month of receipt, and any excess would have to be spent down before the month ends in order to avoid being disqualified for excess property.
If the homeowner is a Medi-Cal beneficiary, a reverse mortgage may make it difficult to transfer ownership of the home to another, thus, resulting in Medi-Cal recovery against the home upon death.
If you go into a nursing home for an extended period of time the reverse mortgage loan will become due, the home may be sold, and any proceeds from the sale of the home may make you ineligible for Medi-Cal.
While reverse mortgages can be a beneficial option for some homeowners, especially where Medi-Cal is a possibility, they must be carefully considered so as to avoid costly mistakes for clients who are likely to enter a nursing home in the future.