Running out of money during retirement is a fear that haunts many of us. An inadequate pension, an unexpected financial emergency, or the death of a breadwinning spouse could suddenly make life very uncomfortable and push an older, already vulnerable person over the poverty line.
One potential solution for struggling older property owners is to tap into their home equity via a reverse mortgage. This type of loan can alleviate cash flow issues and generally doesn’t need to be paid back until the borrower moves out, sells the home, or dies. However, it is difficult to access and manage this process when the homeowner is no longer of sound mind.
Key Takeaways
- There are two cases when power of attorney (POA) is necessary to apply for a reverse mortgage: if a homeowner is mentally incapacitated or if they want someone else to handle their finances.
- Federal law permits the use of POAs on reverse mortgages, but lenders will ask for additional documentation just to be safe.
- Lenders ask for a durable POA that was executed when the homeowner was competent and gives authorization to manage real estate transactions.
- Proof that the POA was executed when the homeowner was of sound mind is usually provided by submitting a supporting letter from the individual’s physician.
Using Power of Attorney (POA) for a Reverse Mortgage
Nobody likes to think that there may come a day when they’re no longer capable of handling their own affairs. However, it can happen and—for the sake of your financial wellbeing and next of kin—it generally helps to accept this sad fact of life before it is too late.
With power of attorney (POA), your child or somebody else whom you trust can immediately step in and manage your finances should you be deemed no longer mentally competent. This could include shopping for a reverse mortgage to ensure that there will be enough money for you to enjoy a stress-free retirement without selling your home.
There are two cases in which POA may be necessary when applying for a reverse mortgage:
- The homeowner is mentally incapacitated.
- The homeowner is of sound mind but no longer wants to think about managing their finances and is happy for their appointed agent to handle this going forward.
The POA must be recorded in the county where the homeowner lives before or at the time of closing the reverse mortgage. It must be the original document and not a copy.
The Rules
Lenders are generally skeptical about POAs because they have been misused in the past and can potentially be fraudulent. So, while federal law permits them to be used on an older person’s behalf for a home equity conversion mortgage (HECM)—the most common type of reverse mortgage—a POA won’t be accepted unless the following requirements are met:
- The agent placed in control of acting on the homeowner’s behalf provides the lender with a copy of a legally valid POA document.
- The POA must be “durable,” meaning that it remains valid when the homeowner becomes incapacitated.
- The POA specifically authorizes the agent to manage real estate transactions.
- The agent submits two forms of identification as well as proof that the homeowner was competent at the time that the POA was executed.
If the POA isn’t accepted, the only alternative way to secure a reverse mortgage on behalf of an older homeowner is by going to court and being appointed the person’s conservator.
Doctor’s Note
The U.S. Department of Housing and Urban Development (HUD) does not specifically reveal how to prove that the homeowner granted POA to the agent before becoming incompetent. However, most lenders agree that the only way to verify this is by submitting a letter from the subject’s attending physician stating that they are no longer able to handle such transactions and arrived at this condition after the POA was executed, witnessed, and notarized.
Meeting this requirement could be an issue if the physician of that period can no longer be contacted, perhaps due to death or retirement, and if the homeowner’s medical records, accessible to the current doctor, don’t provide a date for when full competency was lost. Should these particular events unfold, the lender may not accept the POA and ask for a court-ordered conservatorship to proceed with the reverse mortgage transaction.
POA vs. Court-Ordered Conservatorship
A reverse mortgage lender won’t accept a POA without proof that the homeowner was of sound mind when it was executed. Because the document must be notarized, it’s not possible to get a POA unless the principal is fully aware of what is going on.
Yes, it can be infuriating dealing with these types of inconsistencies. However, remember that lenders create these barriers to protect their client’s interests, and that not providing the documentation that lenders want will likely mean having to go to court to secure conservatorship.
It’s best to avoid this path if you can. A court-appointed conservatorship guardianship will get you the same results, but it is a time-consuming process that can be expensive and invasive.
Be Careful Whom You Choose
A POA can alleviate a lot of stress, but it must not be executed in haste. Think carefully about to whom you would like to give your POA before taking action. Your agent can be a licensed professional, such as a financial planner or an elder law or estate-planning attorney. In any case, you must trust this person and be sure that they will act in your best interest at all times.
Sadly, not everyone behaves honorably when money is on the line. There have been countless occasions of financial elder abuse, including when children and other people entrusted to handle an older person’s affairs have secured reverse mortgages and then diverted all the proceeds into their own bank accounts.
Does your house have to be paid off to get a reverse mortgage?
With a reverse mortgage, you are basically able to borrow part of your home equity as tax-free income. Generally, you must either own the property outright or have paid off a substantial amount of your mortgage. The general rule is that you must have at least 50% equity in your home.
Is the person with power of attorney (POA) responsible for the reverse mortgage?
Yes. However, this doesn’t mean that creditors are going to start sending debt collectors their way if the loan isn’t repaid. Most reverse mortgages are non-recourse loans, meaning that the lender can seize the property but not ask the borrower or the person with power of attorney (POA) for further compensation.
Can the person with POA withdraw funds from the reverse mortgage?
Yes. A person with an approved POA is permitted to withdraw money from the reverse mortgage on behalf of the incapacitated homeowner.
The Bottom Line
POAs are a sensitive topic. On one hand, it makes sense for everyone to elect a person to take over their affairs in the event that they lose their faculties to ensure the best results for them and, eventually, their heirs. On the other hand, pressuring people to take this path can be dangerous and result in individuals not capable of putting aside their personal interests being given the authority to destroy the finances of others.
It’s best to have someone in your life whom you trust to look after your finances and respect your wishes. If that’s the case, it might be wise to get the right POA documentation drawn up by a licensed attorney before it’s potentially too late.