Does Reverse Mortgage Count as Income for Medicaid?

Many older homeowners are concerned about how a reverse mortgage affects Medicaid eligibility. They want to use their home equity while maintaining access to healthcare benefits. Understanding the distinction between income and assets, and how reverse mortgage funds are classified, is important. This article explains the relationship between reverse mortgage proceeds and Medicaid rules.

Basics of Reverse Mortgages and Medicaid Eligibility

A reverse mortgage is a financial product that allows homeowners, typically those aged 62 or older, to convert a portion of their home equity into cash without selling their home. Unlike a traditional mortgage where the homeowner makes monthly payments to a lender, with a reverse mortgage, the lender makes payments to the homeowner, effectively borrowing against the home’s value. The homeowner retains the title to the property and remains responsible for property taxes, homeowner’s insurance, and home maintenance. The loan generally becomes due and payable when the last borrower permanently moves out, sells the home, or passes away.

Funds from a reverse mortgage can be disbursed in several ways to suit different financial needs. One option is a single lump-sum payment, where the entire available loan amount is provided upfront. Another common method involves receiving fixed monthly payments over a set period or for as long as the homeowner lives in the home. A third option is a line of credit, which allows the homeowner to draw funds as needed, providing flexibility. A combination of these disbursement methods is also possible.

Medicaid is a needs-based government program that provides health coverage, including long-term care services, to individuals with limited income and resources. To qualify for Medicaid, applicants must meet specific financial criteria, which typically include both income limits and asset limits. Income generally refers to regular cash received from sources like wages, pensions, or Social Security benefits. Assets encompass financial resources such as bank accounts, investments, and other valuable possessions.

The specific income and asset thresholds for Medicaid eligibility vary by state and program. For example, long-term care Medicaid requirements may differ from acute care programs. This variability means understanding general principles is more important than specific numerical limits, which are subject to change.

How Reverse Mortgage Proceeds are Treated for Medicaid

Reverse mortgage proceeds are not counted as income for Medicaid eligibility. Funds from a reverse mortgage are considered loan proceeds, not earned income or a regular income stream. As a loan against home equity, these funds are viewed differently than monthly pension payments or Social Security benefits, which are classified as income. Therefore, receiving reverse mortgage funds does not impact an individual’s Medicaid income limit.

A crucial distinction arises, however, regarding how these proceeds are treated as assets. While not considered income, any reverse mortgage funds not spent in the month received convert into a countable asset for Medicaid purposes in the following month. Money remaining in a bank account from a reverse mortgage payout at month-end contributes to an individual’s total countable assets. Medicaid has strict asset limits, and exceeding them can result in ineligibility.

The method of disbursement significantly influences the accumulation of countable assets. A large lump-sum payment, if not spent quickly, becomes a substantial countable asset that could immediately exceed Medicaid’s asset limits. In contrast, receiving monthly payments or accessing a line of credit allows for more controlled spending, potentially reducing the risk of accumulating excess countable assets.

With monthly payments, if funds are not spent during the month received, any unspent portion adds to the individual’s assets in the subsequent month. Similarly, unspent funds drawn from a line of credit also count against the asset limit. This highlights the importance of carefully managing reverse mortgage funds to avoid exceeding Medicaid asset thresholds.

Impact of Reverse Mortgage Funds on Medicaid Asset Eligibility

When reverse mortgage funds become countable assets, they directly impact Medicaid eligibility. If accumulated funds, combined with other countable assets like savings or investments, exceed the state’s Medicaid asset limit, the individual may become ineligible. This often necessitates “spending down” assets to meet required thresholds. Spending down reduces countable resources to qualify for Medicaid.

To become eligible for Medicaid, individuals with excess assets must reduce their countable resources through allowable expenditures. Permissible ways to spend down funds without penalties include paying off existing debts, covering medical bills, or making necessary home repairs and modifications for accessibility. Funds can also be used to purchase items considered exempt assets under Medicaid rules. Keeping detailed records of all expenditures is important for documenting the spend-down process during a Medicaid application.

Certain assets are exempt from Medicaid asset calculations, meaning their value does not count towards eligibility limits. The primary residence is often exempt, provided it is the individual’s principal place of residence and meets any state-specific equity limits. One vehicle, household goods, personal belongings, and pre-paid burial plans up to a certain limit are also exempt assets. Utilizing reverse mortgage funds to maintain or improve an exempt asset, such as essential home repairs, can reduce countable cash assets without negatively affecting eligibility.

Asset limits and specific spend-down rules vary by state. Individuals should research the specific regulations in their state of residence to ensure compliance with Medicaid requirements. While reverse mortgage funds are not considered income, their careful management as assets is necessary to maintain Medicaid eligibility, particularly for those requiring long-term care services.