What exactly is a non-borrowing spouse (NBS)? In this article, we’ll cover what a non-borrowing spouse is and the key HECM reverse mortgage protections they inherit if the older spouse passes away.
A non-borrowing spouse (NBS) is a spouse who is not a full borrower on a reverse mortgage loan agreement, but they inherit some key program protections if the older spouse passes away.
There are a few different reasons why a spouse might be a non-borrowing spouse, but the most common is age. The minimum qualifying age for a HECM reverse mortgage is 62. However, if you’re married, only one spouse needs to be at least 62. The other can qualify as a non-borrowing spouse and inherit the protections that come with a reverse mortgage.
Important new protections for non-borrowing spouses (NBS)
The Department of Housing and Urban Development (HUD) made important changes to the HECM in April 2014 to better spouses younger than 62. Prior to the change, only individuals over the age of 62 could be on the reverse mortgage loan agreement. This created a big potential pitfall for spouses younger than 62 if the older spouse passed away. The death of the older spouse triggered a maturity event that made the loan balance due and payable in full. The younger spouse (who was not on the loan agreement) had to either pay off or refinance the loan balance or be forced to sell the home.
Fortunately, HUD resolved this problem by creating new protections for spouses younger than 62. Today, non-borrowing spouses can remain living in the home after the older spouse passes away without having to repay the loan balance. This so-called deferral period remains in effect as long as the non-borrowing spouse fulfills the program obligations, including living in and maintaining the home and paying the required property charges.
In 2021, FHA expanded the deferral period eligibility to include non-borrowing spouses married to individuals who have lived in a health care facility for at least the last 12 consecutive months.
Also in 2021, HUD removed the requirement for non-borrowing spouses to establish marketable title or demonstrate their legal right to remain in the home following the death of the older spouse. This change makes it easier to establish eligibility for the deferral period.
Though non-borrowing spouses can “inherit” the protections built into the HECM, they do not receive any remaining funds in the HECM. Any remaining term/tenure payments are discontinued and/or any available line of credit is closed out when the older spouse passes away.
NBS income can help you qualify
Financial ability is one of two major components of the HECM financial assessment guidelines rolled out by FHA in 2014. FHA designed the new financial assessment guidelines to reduce defaults due to nonpayment of required property charges. FHA now requires lenders to more extensively analyze income and expenses as part of the HECM reverse mortgage qualification process.
The financial ability assessment focuses on whether you have enough residual income to pay debt obligations, property charges, home maintenance, and living expenses. If you’re short on residual income, the lender may require a life expectancy set-aside (LESA).
It’s possible to avoid the LESA by documenting one or more compensating factors. There are many potential compensating factors, but the one relevant here is non-borrowing spouse income. If you’re married and your spouse is to be a non-borrowing spouse, you can use his/her income as a compensating factor to meet the residual income requirements. The lender will pull a credit report for your spouse and will add his/her income and debt obligations to the residual income calculation. Any derogatory credit items on your spouse’s credit report will be ignored for purposes of the satisfactory credit analysis. If you and your spouse’s combined income meet the residual income requirements, then you should be able to avoid the imposition of a LESA based on income.