New rules that took effect last month protect widowed spouses whose homes are subject to a reverse mortgage. But for borrowers who will be seeking such loans, there is a downside as well.

A rule change now in effect requires that both spouses must be listed as mortgage holders on a reverse mortgage. That means the widowed spouse cannot be evicted from the home when their partner dies.

That's the good news. The bad news is that the rule change will limit how much a person can borrow with a reverse mortgage if their spouse is younger than they are.

Under the previous rules, a married person age 62 or over could seek a reverse mortgage in his or her own name, independently of their spouse. This sometimes happened when one partner had sole ownership of the home, or when the other spouse was younger than 62 and therefore ineligible for a reverse mortgage.

What would happen though, is that the loan would come due when that spouse died or had to enter an extended care facility. That often meant that the younger spouse would lose the home, since they had no way to repay the loan, aside from selling the property.

Younger spouses now protected - with restrictions

Under the new guidelines, both spouses are automatically considered to be parties to the loan, even if one is under age 62 and would not otherwise qualify for a reverse mortgage. That means there's no requirement to repay the loan as long as they continue to live there, and it cannot be taken by foreclosure.

The rule is retroactive, meaning that spouses who were not originally listed on the mortgage are now automatically added to it as co-mortgage holders, provided they were married to the primary mortgage holder at the time the reverse mortgage was originated.

Will reduce amount that can be borrowed

There are a few other wrinkles to the new rules. For one, the amount a homeowner will be able to borrow will now be based upon the age of the younger spouse, even if that person is younger than age 62. In a reverse mortgage, the older the borrower, the more equity they can borrow against. So if a 64-year-old borrower has a 52-year-old spouse, that means they'll be eligible to borrow less than they could have if they were the only one on the loan.

Also, as noted above, a couple must be married at the time the loan was taken out for both spouses to be automatically included. A person who marries someone with a reverse mortgage will not be protected against foreclosure in the event their partner dies.

Finally, the surviving spouse will still be responsible for all property taxes and utilities and still could lose the home for failure to keep up with those expenses, the same as with the original borrower.

Published on September 5, 2014