Reverse Mortgage Can Affect Some Government Benefits

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Reverse Mortgage Can Affect Some Government Benefits

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Unless you plan carefully, income from a reverse mortgage can affect your eligibility for certain government benefits. Although income from a reverse mortgage will not affect Social Security, Medicare or pensions that are not based on need, recipients of Supplemental Security Income (SSI), Medicaid, food stamps and certain other state “need based” benefit programs may be affected. These beneficiaries must meet strict financial guidelines in order to be eligible for benefits.

According to The American Bar Association’s “Legal Guide for Older Americans,” the reverse mortgage payments generally will not affect eligibility for benefits if you spend the money during the month in which it is received. But, if you do not spend the money during that month, it will be counted as a resource. If your resources exceed the allowed limit your benefits could be reduced or eliminated. State rules vary—it is highly important to check the rules in your state.

Rules are different for reverse annuity mortgages. This type of reverse mortgage allows you to receive loan payments under an annuity even after you move from your home. Reverse annuity mortgage payments are counted as income for SSI, Medicaid and other income-based benefits even if spent in the month in which they are received. They reduce benefits and may affect your eligibility altogether. Annuities also receive less favorable tax treatment.

A reverse mortgage is a special type of loan available nationwide to older homeowners (62+) that enables them to convert part of the equity in their homes into tax-free income, without selling the home, giving up title, or taking on a new monthly mortgage payment. Borrowers may spend the loan funds however they wish, and can take out the loan as a line of credit, lump-sum payment, fixed monthly payments, or a combination. The loan size depends on the borrower's age and other factors, and the loan doesn't have to be repaid until the borrower moves out of their home permanently.

Reverse mortgages are very complex says the American Bar Association (ABA) and involve difficult financial, legal and personal decisions. The ABA advises careful examination of contracts and to look for alternatives that may suit your needs. Before signing, talk to a lawyer familiar with the issues.

For more information: “The American Bar Association Legal Guide for Older Americans, The Law Every American Over Fifty Needs to Know,” 1998, $13 at bookstores. Presented in plain everyday language—the definitive legal reference for all older Americans who want to understand their rights and plan for the future. Highly recommended.

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January 2003