The occupancy requirement for a reverse mortgage seems simple and self-explanatory for a product with guidelines that are otherwise characterized as complex. Occupy your property, right? Nevertheless, I believe the finer details regarding the occupancy requirements are still widely misunderstood by homeowners, loan originators, and even regulatory agencies.
By now, everyone should know that a reverse mortgage is a financial product that allows older homeowners to access a portion of their home equity. Homeowners are made aware that this is only available for their principal residence. Consequently, the homeowner must certify each year that they continue to occupy the residence.
But what about extended travel? What about assisted living? What about my own parents, who volunteered to teach for multiple semesters at a school for overseas missionaries? Do these actions cause the loan to mature?
Challenging conventional wisdom?
I recently asked a large group of reverse mortgage specialists, “When a borrower is away from their home, how long before the reverse mortgage loan matures?” The answers I received were varied – 6 months, 183 days, more than half a year, 12 months, 12 consecutive months, and more. Yet, none of these answers are technically correct.
In a 2020 presentation, I joined educators Jim McMinn (Longbridge Financial) and Craig Barnes (Reverse Mortgage Funding) in challenging the industry to “Know the Rules of the Game.” In this presentation, we explained that HUD regulations do not necessarily prevent a borrower from traveling the national parks for a year. The requirements are more detailed and should be better communicated.
For example, are we telling seniors about the “2-month communication” rule? Most reverse professionals are not aware of that one. Are we unnecessarily frightening seniors with a “6-month rule” that does not exist? Are we misusing the “12-month rule” in cases where the borrower is healthy?
So, what are the occupancy guidelines?
The most important occupancy guidelines can be summarized as follows; borrowers must continue to certify their occupancy each year, and the home must be the principal residence of at least one borrower. While there are additional caveats for non-borrowing spouses, it is important to know that HUD defines a principal residence as where the borrowers “typically spend the majority of the calendar year.” That one word – typically – is critical and was not placed there by mistake. Here is how regs read:
“Principal residence means the dwelling where the borrower and, if applicable, Non-Borrowing Spouse, maintain their permanent place of abode, and typically spend the majority of the calendar year. A person may have only one principal residence at any one time. The property shall be considered to be the principal residence of any borrower who is temporarily in a health care institution provided the borrower’s residency in a health care institution does not exceed twelve consecutive months.” 24 CFR § 206.3
Therefore, we should be careful to document the principal residence of any “snowbird.” However, HUD Handbooks and the loan agreement go into more detail.
- The 2-month communication rule
Every loan originator should highlight this HUD requirement as a potential pitfall. According to HUD 4330, the borrower should ALWAYS notify their servicer if they plan to be absent from the home for two months.
HUD 4330 CH13-22(A)3 requires the mortgagor to “advise the mortgagee of absences from the property. The mortgagee must be advised of absences from the property in excess of two months to avoid determinations that the mortgagor’s principal residence has changed.”
- The 6-month rule does not exist
It turns out the Loan Agreement does not require “occupancy for a minimum of 6 months each year” or “a majority of the year” as some have argued. The Loan Agreement has always been consistent with HUD’s requirement to maintain the home as a “principal residence.”
HUD’s definition of principal residence deliberately uses the word “typically” to describe their occupancy during a calendar year. Therefore, single-year occupancy that is NOT typical is irrelevant. There is no maturity event so long as the travel is communicated to the servicer, the home is not abandoned, and there is a logical reason for the borrower’s absence.
Loan Agreement Article 1.20 states “Principal Residence means the dwelling where a Borrower, and if applicable, a Non-Borrowing Spouse maintains his or her permanent place of abode, and typically spends the majority of the calendar year.”
- The 12-month rule is misapplied to these cases
It is NOT correct for us to state that completing missions work, or even travelling the world for a year, will automatically cause the loan to become due and payable. Both 24 CFR § 206 and HUD 4330 are specifically referring to occupancy in a nursing home or assisted living facility (i.e., cases involving “physical and mental illness”).
24 CFR § 206.27(c)(2) states, “For a period of longer than 12 consecutive months, a borrower fails to occupy the property because of physical or mental illness…”
HUD 4330 CH13-22(C) uses similar language stating, “…Out Of Occupancy Due To Physical And Mental Illness For More Than 12 Months.”
Are Homeowners being harmed by occupancy confusion?
We do encounter homeowners that are scared to get a reverse mortgage because reference material indicates that extended travel is not allowed. Some borrowers have canceled reverse mortgage applications because consumer guides – designed to advise homeowners on their rights and responsibilities – incorrectly advise that the loan matures if “you are away for more than 6 months for non-medical reasons.”
“Snowbirds,” living half the year in warmer states are cautious in getting reverse mortgages. Also, homeowners that wish to travel in recreational vehicles have expressed worry.
The most common concerns are coming from members of the Church of Jesus Christ of Latter-day Saints who wish to spend a small portion of their retirement years in service missions throughout the world. These missions are voluntary and generally require a 6-18 month commitment which can be problematic.
Curtis Packer, a Reverse Mortgage Professional in South Ogden, Utah notes that “The problem is not so much that clients don’t choose to obtain a reverse mortgage. They end up having to choose between serving their church or making their retirement better. That’s not a choice they should have to make.”
Matt Harrison, a Reverse Mortgage Professional in South Jordan, Utah agrees and estimates that over 70% of his clients are considering serving a mission in retirement. “The choice to serve a religious mission or service/humanitarian mission should not be a disqualifier for a reverse mortgage.”
Keep in mind, a commitment to missionary service typically does not result in the borrower establishing a “principal residence” elsewhere. This makes their long-term housing intentions clear – this is temporary. They do not establish another principal residence during, or after, their mission.
How should we advise homeowners?
To better serve our clients, we need to communicate clearly and even provide caution when needed. Below is my proposed messaging to clients who wish to travel in retirement:
Reverse mortgage products are designed to assist homeowners as they live out their retirement in their own home. Consequently, HUD requires you to occupy your home as your principal residence. HUD defines “principal residence” as where you maintain your permanent place of abode and typically spend the majority of the calendar year. If you plan to travel for more than two months, it is imperative you communicate your plans to your lender or loan servicer. Here are some recommended guidelines for extended travel:
- Communicate with your servicer about travel plan greater than two months
- Write a detailed letter of explanation and send a copy to your servicer
- Arrange for on-going maintenance of the property during your travel
- Confirm with your servicer an “Alternate Contact” in case of emergency
- Ensure that you do not establish a permanent residence elsewhere
- Ensure that all property charges are paid on time
- Arrange for your annual occupancy certificate to be forwarded, if needed, and ensure it is returned on time
There’s still disagreement in the industry about the occupancy requirement, and I’m hoping this is the first step to clarify with our servicers and regulators a recommended set of procedures. This will ensure clients know their contractual responsibilities under the Mortgage Note and the Loan Agreement.
This column does not necessarily reflect the opinion of Reverse Mortgage Daily and its owners.
To contact the author of this story: Dan Hultquist at UnderstandingReverse.com
To contact the editor responsible for this story: Chris Clow at firstname.lastname@example.org