Many older adults may consider using a reverse mortgage to supplement their living expenses. If you have clients who are considering this estate planning product, it’s crucial for you to understand how it can affect Medicaid eligibility. So, let’s take a closer look at how reverse mortgages work and how your clients may be able to use one while still achieving eligibility for benefits.
What is a Reverse Mortgage?
A reverse mortgage is designed for adults age 62 or older to convert a portion of their home equity into cash. This type of loan allows individuals and couples to avoid selling their home and, instead, use their equity to supplement some of their living expenses.
While a regular mortgage requires homeowners to pay the lender each month for their home, a reverse mortgage is a loan where the lender pays the homeowners. Essentially, these payments are advanced payments on the owner’s home equity, which they do not have to pay back as long as they continue living in the home. If they sell the home or move out, however, the homeowners will need to repay the loan. If they pass away, the loan must be repaid by their spouse or estate. In many cases, this involves selling the home in order to repay the reverse mortgage loan.
Medicaid Eligibility and Reverse Mortgages
Like other estate planning products and strategies, a reverse mortgage can have a big impact on a person’s eligibility for Medicaid benefits. Although the payments from a reverse mortgage are not considered income in most states, if that money is left unspent within the month received, the remaining balance will be carried into the next month, thus increasing the individual’s total countable assets. In certain states, the reverse mortgage payments may be considered assets in the month they are received. Visit our State Resources page to view your state’s Medicaid manual.
Can a Single Person Qualify for Medicaid with a Reverse Mortgage?
If you have a single client who wants to utilize a reverse mortgage and qualify for Medicaid benefits, they may want to reconsider. Since a single person is subject to a constant Medicaid asset limit of $2,000 in most states, any unspent payments from a reverse mortgage will affect their eligibility. Additionally, if they leave their home and move into a nursing home, they would either not qualify for a reverse mortgage or be forced to pay back an existing reverse mortgage.
Can a Married Couple Qualify for Medicaid with a Reverse Mortgage?
On the other hand, married couples may be able to utilize a reverse mortgage as long as the payments are made payable only to the community spouse. This may help them supplement their income and maintain their lifestyle in the community. However, if payments are made to both spouses, the institutionalized spouse may exceed their asset limit and lose their benefits.
Married couples who want to use a reverse mortgage must wait to do so until after the institutionalized spouse gains eligibility for Medicaid. The community spouse must be within the Medicaid asset limitations at the time of application, but the state Medicaid agency only reviews the institutionalized spouse’s assets going forward. Thus, once they become eligible for benefits, any reverse mortgage payments to the community spouse will not affect their spouse’s Medicaid eligibility.
Again, once the homeowner is no longer able to reside in their home, they must pay off the reverse mortgage debt. So, if the community spouse is expecting to need nursing home care in the near future, a reverse mortgage might not be in their best interest.
As with any Medicaid strategy, we recommend first discussing the impact a reverse mortgage will have on your client’s case with the state Medicaid agency or an elder law attorney in your area.
If you have senior clients who are looking to qualify for Medicaid benefits and you’d like to understand their options, we can help. Learn more about our Medicaid Compliant Annuity and contact our office to get started.