How Does a Reverse Mortgage Affect Medicaid?

A reverse mortgage allows homeowners aged 62 or older to convert home equity into cash without requiring monthly mortgage payments. Medicaid, a joint federal and state program, provides healthcare coverage to low-income individuals and those with limited resources. It is significant for funding long-term care services, such as nursing home care or in-home support, for many seniors.

Understanding Reverse Mortgages and Medicaid

A reverse mortgage is a loan secured by the borrower’s home; the homeowner retains title and ownership. Unlike a traditional mortgage, the borrower makes no monthly payments; the lender makes payments to the borrower. The loan becomes due when the last borrower permanently leaves the home, sells it, or passes away. Funds can be received as a lump sum, monthly payments, or a line of credit, and are considered loan proceeds, not income.

Medicaid serves as a “payer of last resort” for healthcare expenses, meaning other resources must be utilized first. Eligibility for Medicaid, especially for long-term care services, hinges on financial criteria, including limits on income and assets. An applicant’s primary residence is an exempt asset for Medicaid eligibility, provided the applicant or spouse resides in it. This exemption applies up to a certain equity value.

How Reverse Mortgage Proceeds Affect Medicaid Eligibility

While the home is generally an exempt asset for Medicaid eligibility, liquid cash from a reverse mortgage can significantly impact eligibility. Once proceeds are disbursed and held in bank accounts or other investments, they convert from exempt home equity into countable assets. Accumulating these funds can quickly cause an applicant’s total assets to exceed Medicaid’s asset limits. For example, a single applicant’s countable assets are often limited to around $2,000.

To maintain Medicaid eligibility, individuals must manage any reverse mortgage funds to remain within asset limits. This often involves “spending down” excess funds on non-countable assets or legitimate expenses before applying for Medicaid. Permissible expenditures include home repairs, medical bills not covered by insurance, or reducing existing debts, ensuring fair market value and not considered a gift. Funds must be spent in the month received to avoid being counted as assets in subsequent months.

The Medicaid “look-back” period spans 60 months (five years) immediately preceding a Medicaid application for long-term care. This period allows state Medicaid agencies to review financial transactions, particularly transfers of assets for less than fair market value. While the reverse mortgage loan is not a transfer subject to this rule, gifting or transferring proceeds to others for less than fair market value within this look-back period can result in a penalty period of Medicaid ineligibility.

Receiving reverse mortgage funds as a line of credit offers an advantage for Medicaid planning over a lump sum. Funds held in an undrawn line of credit are not counted as an asset until accessed by the borrower. This allows the homeowner to access funds only as needed, minimizing countable asset accumulation that could jeopardize Medicaid eligibility. Careful consideration of the disbursement method is important for those anticipating a future need for long-term care Medicaid.

Medicaid Estate Recovery and Reverse Mortgages

Upon the death of a Medicaid recipient who received long-term care benefits, the state seeks reimbursement for those costs through the Medicaid Estate Recovery Program (MERP). This program allows states to recover funds from the deceased’s estate, which commonly includes their home, even if exempt during their lifetime for eligibility. The reverse mortgage loan becomes due when the last borrower dies or permanently moves out of the home. The reverse mortgage lender holds a lien on the property, which gives them a priority claim to the home’s value upon sale, ahead of other claims, including those from Medicaid estate recovery.

Heirs of the deceased homeowner have options: they can repay the reverse mortgage loan, by refinancing or selling the home, to keep the property. If the heirs do not repay the loan, the lender may initiate foreclosure proceedings to recover the outstanding balance.

After the reverse mortgage is satisfied, any remaining equity in the home is subject to the Medicaid Estate Recovery Program’s claim. The state can recover up to the amount of Medicaid long-term care benefits paid on behalf of the deceased recipient. If the home’s value is insufficient to cover both the reverse mortgage and the Medicaid claim, the reverse mortgage is repaid first, and Medicaid recovers what remains.

Exemptions or waivers may apply to Medicaid Estate Recovery, delaying or preventing recovery in specific circumstances. These include cases where a surviving spouse, a child under 21, or a blind or disabled child of any age resides in the home. Understanding these provisions is important for families navigating the financial implications after a loved one’s passing.