Reverse mortgages tap into home equity by providing a lifetime income stream in exchange for a mortgage on your residence. A caller asked this week whether proceeds from a reverse mortgage on his homestead would be exempt from future creditors. Specifically, the caller was considering placing the reverse mortgage, moving from the property into a new homestead, and renting the initial homestead subject to the reverse mortgage
In the first place, I do not know if reverse mortgage programs require the borrower to maintain the mortgaged property as his principal residence. Assuming the caller could move into another homestead and retain the reverse mortgage, I think there is a possibility that a creditor could attack future loan payments after the borrower moves from the homestead, although I don’t know of any court decisions on this issue. As long as the borrower lives in the mortgaged property money received from the bank is homestead proceeds.
A creditor probably could not garnish future payments. Moving from the homestead means that future payments are from equity in what is now a non-exempt rental property. (I assume the property has no other protection, such as tenants by entireties). The borrower, debtor, could argue that he acquired a vested right to future payments at a time when the house was homestead and that the exemption of all payments is locked-in at that time. In other words, the exempt or non-exempt nature of reverse mortgage proceeds is determined when the mortgage is placed and not when each payment is received.
In any event, payments received and deposited in the debtor’s financial account would no longer be exempt even if payments were deemed proceeds of homestead equity, unless the bank account is otherwise exempt from creditors. Money from the sale or finance of a homestead is only exempt in a bank account if the money is segregated and intended to purchase a new homestead within a reasonable time. Using reverse mortgage proceeds to purchase directly an exempt financial asset, such as an annuity, would extend protection.