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Medicaid is being used by many low income seniors to pay for long term care. For many of them, the homestead represents their largest asset. To qualify they must meet 4 standards and one is low resources. The homestead is protected, and does not count as a resource.

The full value of your home (whether $10,000 or $1,010,000) is exempt. But there is an important condition: your home is exempt only if you express intent to return to it if you are able to leave the nursing home, or if your spouse or a dependent continues to reside there.

In this context, "homestead" means your principal place of residence before moving to the nursing home. It is broader than the use of the word "homestead" in Texas property law, because for Medicaid purposes there is no limit on the number of acres that are non-countable.

Before you go to the nursing home, you (or your spouse or dependent) must have lived in the home you claim as exempt. You cannot claim any other type of real estate as an exemption.

The exemption relies on your intentions, not your abilities. It does not matter that you may be too incapacitated to actually return to your home. Therefore, you should think long and hard before deciding that you will never go home again.

Planning opportunity: cash funds invested into the homestead shift assets into the non-countable column. Pay off the mortgage / Recarpet / Paint / Appliances / AC… and qualify for Medicaid sooner.

When you apply for Medicaid, your home is an exempt asset only so long as you intend to return to it. If you have no spouse or child who resides in the home, does it have to sit unoccupied?

No, it can be rented out temporarily – so long as you are very careful about the process.

Do not rent it out for a long period (like a one- or two-year lease) because Medicaid might claim that you cannot return to the home. If you cannot return, it loses homestead status and becomes just another countable asset. And as a countable asset, it might disqualify you from receiving Medicaid assistance.

A short-term lease is therefore safest for Medicaid purposes. The best arrangement is a month-to-month lease, so that you can move the tenant out promptly.

When you receive rent, the money is income. You do not want that income to shove you over the $1,590 limit, or you will be disqualified from receiving Medicaid assistance (or you’ll have to obtain a Qualified Income Trust).

Since 1997 up to today, the Texas Department of Human Services has had regulations dealing with rental income. The question is: what are the situations where they will count rental income against you?

If you have a corresponding expense that offsets the income, then the income may not count against you. For instance, if your tenant pays exactly the amount needed to maintain the property then you do not have any additional income.

If the home has a mortgage, any principal paid by the tenant directly to the mortgage company on behalf of the Medicaid beneficiary does count as income. It also is not available as an offsetting expense. This means that an equal amount would have to be paid to the nursing home by someone on behalf of the beneficiary—making this an undesirable strategy.

The regulations do offer an unusual alternative: have the tenant pay only the interest portion of the monthly mortgage. Interest is an expense, and not treated as income. A family member who does not reside in the house should pay the principal. Why would a family member do so? Perhaps he or she expects to inherit the house someday. Making the payment protects and preserves the property.

A vacant house is exposed to many risks. It might be vandalized. It is a drain on family funds for property taxes and for maintenance. And the homeowner’s insurance company may resist covering the home against fire and theft if it is vacant for a long period. These risks motivate you to let someone occupy the home.

Many families allow a younger relative to "house-sit." Perhaps a grandchild in college could live in the home rent-free. If so, the risks of vacancy are reduced and the home is still exempt for Medicaid purposes.

If there is no relative who can occupy the home, leasing it out seems logical. Remember, however, that for the home to be non-countable, the home must be available for the homeowner to return to it. A long-term lease makes it unavailable, and it may loose its non-countable status. Thus, a short-term or month-to-month lease is the safer approach.

A transfer between spouses does not trigger the penalty. Medicaid does not care if title to the house is in the name of both spouses, in the name of the patient, or in the name of the community spouse. Often, it is sensible to put the house into the name of the community spouse. Why? If the patient dies, there will be no need to probate a Will to pass title to the survivor.

Likewise, a transfer of the home to an adult child who is either blind or disabled does not trigger the penalty.

Finally, transfer of the home to an adult child causes no transfer penalty if 1) that child has lived in the house for at least two years before the parent moved into the nursing home, and 2) that child provided support services to the parent that allowed the parent to avoid moving to the nursing home for some time. Proof of those services must take the form of a letter from the doctor attesting to the services provided.

Selling for cash = exposing the resource as countable.

Selling on owner carry = the note is a countable resource, and is non-liquid to boot

Selling to a family member at below market rate = a disqualifying transfer

Selling on a contract for deed = transfer for value, but the note is a countable resource

Property Code provisions relating to executory contracts for conveyance of real property have been significantly changed – effective 9/1/01.

Code requires special contract provisions for any Executory K for sale of residential real estate that will be occupied by the Buyer // New: or by someone related to the Buyer to the second degree of consanguinity

Does not apply to sale of state land or by veterans’ land board

Seller must disclose property condition before K is signed. NEW: seller must give copy of tax certificate and insurance policy before K is signed – failure is a Deceptive Trade Practice.

Notice in K that oral agreements are void, K is whole agreement is required – failure is Deceptive Trade Practice.

New: K must be recorded within 30 days of signing

Default: no more hand-delivery or tack-up of default notice; CM/RRR only

No more timed notice based on number of payments made. All situations call for 60 day right to cure. Only 2 remedies // 40% equity or 48 payments – seller can only sell the property like a foreclosure, and must pay buyer his equity and any appreciation – all the Seller gets is the remaining contract balance // below 40% or 48 payments – yes rescission or forfeiture & acceleration

While buyer is not in default, Seller must provide an annual accounting. List of details that must be reported have expanded, and NEW: failure to report punished by liquidated damages of $250 per day after January 31 each year PLUS attorney’s fees.

 

The 1997 law, which was the first Texas law to allow reverse mortgages, made them available to any Texan age 55 or older.

Unanticipated problems arose with the constitutional provisions authorizing these new liens. The amendment was faulty in the sense that it did not match federal underwriting regulations. As such, there was no resale market for Texas reverse mortgages. The problems resulted in lender refusals to make loans in some circumstances because of their inability to strictly comply with the constitutional requirements. (A lender cannot force a home equity borrower to repay the loan if the lender violates the constitutional provisions.)

AGE -- The 1997 amendment made reverse mortgages available to any Texan age 55 or older. The 1999 update backed off on the age, restricting reverse mortgages to Texans age 62 plus, or whose spouse is 62 plus. This change was made to comply with federal lending regulations, which allow only those 62 or older to use reverse mortgages.

SIZE of HS -- The Constitution prohibited a home equity loan or a reverse mortgage from being secured with any property other than the homestead. Because many urban lots exceed one acre in size and could not be legally subdivided, lenders could not obtain a valid lien on only the homestead (one acre). To address this situation, the Constitution would have to be amended to permit (i) a legal homestead in excess of one acre, or (ii) the lender to accept property in addition to the homestead as collateral.

TYPO - A lender could not require any principal or interest payment on a reverse mortgage until: (A) the homestead property securing the loan is sold or otherwise transferred, or (B) all borrowers cease occupying the homestead property as a principal residence for more than 180 consecutive days and the location of the homestead property owner is unknown to the lender. Thus if the homestead was abandoned but the lender knew where the borrower was, the note could not become due. Consequently no reverse mortgages were made in Texas, substantially because the loans could not be federally insured and sold in the secondary market with this nonstandard term.

In 1999, the legislature changed the law to conform to federal regulations. The 76th Texas Legislature unanimously approved S.J.R. 12 to allow reverse mortgages loans to be offered in Texas. On November 4, 1999, that constitutional amendment was approved by voter referendum.

SIZE OF HS UPPED TO 10 ACRES -- SJR 12 redefined a Reverse Mortgage to be consistent with federal law. SJR 22, among other matters, increased the maximum size of an urban homestead to 10 acres. In addition, Senate Bill 496, passed by the 76th Legislature, amended Texas Property Code Sections 5.042, 41.002, and 41.005, and added new Section 41.008, to further develop the concept of the 10 acre urban homestead, prescribe permissible uses of rural and urban homesteads, and permit an existing lien upon part of a homestead to extend to another part of the homestead. Certain of these amendments were contingent upon voter approval of SJR 22. The bill became effective on January 1, 2000.

Reverse Mortgages are often of greatest interest to Seniors who have extensive equity in their homes. They allow monthly payments to be made from the lender to the homeowner, and are typically on between 30-50% of the total home equity. The owner can spend the money for any purpose.

Interesting facts: Cash strapped, home rich, alone and older than most = reverse mortgage applicant

* The median age of those using HUD reverse mortgages tends to be older (75) than the average elderly American homeowner (72).

* Homeowners getting reverse mortgages are more likely to be single female households (56.3 percent) than the average elderly American homeowners (27.6 percent).

* The homes of reverse mortgage holders are more valuable ($107,000) than the homes of the average elderly American homeowner ($87,000).

* The properties with reverse mortgages are older (41 years) than the average elderly American homeowner's home (38 years). However, the average cost of needed repairs is lower - $666 compared with $836 - as is the square-footage of the homes - 1,327 square feet compared with 1,700 square feet.

All reverse mortgages turn your home equity into three things:

· How much would I get? == loan advances paid to you;

· How much would I pay? == loan costs paid to the appraiser, lender, insurer, servicer, and others; and

· How much would be left at the end of the loan? == leftover equity, if any, paid to you or your heirs at the end of the loan.

(1) The lien must be voluntary and both spouses must sign it. It is not possible for only one spouse, acting alone, to place a lien against the homestead unless that spouse either a) has a Durable Power of Attorney from the other, or b) is the court-appointed Guardian of the other.

(2) The loan must be without recourse for personal liability against each owner.

(3) The lender is not allowed to reduce the amount or number of advances because of an adjustment in the interest rate if periodic advances are to be made. If the lender doesn’t live up to its end – it fails to make loan advances as contracted and doesn’t cure its default as required in the loan contract – then the lender forfeits all principal and interest of the reverse mortgage.

(4) The Texas constitution further requires that before signing a reverse mortgage, the owner must attest in writing that he or she received counseling on the advisability and availability of reverse mortgages. The counseling must include a discussion of other financial alternatives. You can call on your attorney or call on your financial planner to receive the required financial counseling.

HOW MUCH CAN YOU BORROW?

A borrower who uses an FHA-insured Home Equity Conversion Mortgages (HECM) will receive a reverse mortgage amount based on a formula that includes a Maximum Claim Amount. In general, this means the maximum amount you can receive will be determined by factors including the age of the borrower(s), and the appraised value of the property (or the maximum FHA mortgage amount for your area, if lower). For example, based on a loan at recent interest rates, a 65-year-old could borrow up to 26 percent of the home's value, a 75-year-old could borrow up to 39 percent, and an 85- year-old could borrow up to 56 percent.

Why? The older you are, the shorter you’ll survive and the less time for interest owed to build up. So more equity is available in loan.

You receive the loan in one of three ways:

1) a single lump-sum disbursement,

2) equal monthly payments for as long as both borrowers live in your house or

3) equal monthly payments for a set period of time.

For a 70 year old husband, 69 year old wife, with a home valued at $100,000 in zip code 78212:

HECM == FHA Loan

HomeKeeper === FannieMae Loan

What are the Interest Rates? There are no fixed rates == All RM's are Adjustable Rate Mortgages (ARM's). For most of this year, the rates charged on the FHA/HUD RM have been below 5.25. The ARM's are tied to the One Year Treasury and the interest is compounded monthly – it is a negative amortized loan. ALL lenders charge the same federally regulated interest rates.

REPAYMENT -- The loan must, of course, be repaid – but not until either:

REMAINDER: Will I still have an estate that I can leave to my heirs?

When you sell your home or no longer use it for your primary residence, you or your estate will repay the cash you received from the reverse mortgage, plus interest and other finance charges, to the lender. All proceeds beyond what you owe belong to you or your estate. This means the remaining equity in your home can be passed on to your heirs. None of your other assets will be affected by HUD's reverse mortgage loan. No debt will ever be passed along to the estate or heirs. You retain ownership of your home, and may sell or move at any time.

RISKS –

1) Foreclosure for failure to comply with loan

2) No remaining equity to leave to family – house is always disposed of, or a family member can pay off the loan (buy the house)

3) You get a little and pay a lot

(C) 2001 Paul Premack