Is a Caregiver Loan a Good Alternative to a Reverse Mortgage?
A new home financing program for seniors known as the caregiver loan may sound like an affordable and less risky alternative to a reverse mortgage – but is it really as good as it sounds?
What is a caregiver loan?
A caregiver loan is a special type of financing arrangement in which family members contribute money toward a fund set up for the senior homeowner.
The important thing to understand about caregiver loans is that they are what’s known as peer-to-peer loans, meaning the bank/mortgage company does not actually lend out the money. Instead, the money is lent between relatives and the bank or lender’s only role is to handle the paperwork.
How does it work?
Family members can contribute any amount they wish, and they are paid back after the homeowner passes away and the home is sold, or by buying one another out.
For example, an older homeowner’s adult children may each contribute $500/month toward the loan. This money is used by the homeowner for whatever they want – housing costs, insurance, taxes, basic living expenses, etc. Once the homeowner passes away, the children can sell the home and split the profit between them. Or, one child can buy the other(s) out of his/her share and keep all profit from the sale of the home.
Who could benefit from a caregiver loan?
It’s possible that an intra-family loan may have fewer restrictions than a reverse mortgage. For example, the caregiver loan may not have restrictions on the homeowner’s age, or the home’s primary residence status. Caregiver loans may also not have a mortgage insurance premium.
Due to their less restrictive nature, caregiver loans may be a good solution for people who cannot qualify for a reverse mortgage. However, keep in mind that very few lenders offer this type of loan. Even if you can find a lender who offers this type of loan, they may not necessarily be licensed in your state.
A better alternative may be to draw up an intra-family loan and have the family lawyer handle the official paperwork.
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What are the drawbacks?
While advertised as a low-cost alternative to a reverse mortgage, the caregiver loan does have some potential drawbacks and may wind up costing more than you think.
Here are a few potential snags you could run into when using a caregiver loan or intra-family loan:
- Contributing family member(s) suddenly unable to make their monthly contribution.
- Contributing family member passes away.
- The senior homeowner gets behind on mortgage payments and loses the home.
- The home drops in value and, as a result, the sale of the home will not sufficiently reimburse the relatives for their contributions.
In the last two situations, the contributing relatives risk never being fully reimbursed for their contributions AND losing the home itself. Obviously, all potential risks would need to be addressed and everyone involved in the loan would have to agree on what would be done in each situation. Again, it may be best to consult a lawyer when considering this type of arrangement.
Is a reverse mortgage less risky?
By contrast, a reverse mortgage offers protections against some of the risks listed above. With a reverse mortgage, the senior homeowners’ heirs/relatives are not responsible for supplying the funds and therefore are at no risk of losing their money, even if the home sells for a loss.
In fact, reverse mortgages that are backed by the FHA – also known as Home Equity Conversion Mortgages (HECM) – are insured against this type of loss (which is one of the reasons having to pay mortgage insurance can be worth your while).
With a reverse mortgage, the loan becomes due once the homeowner no longer uses the home as his/her primary residence. So, if the homeowner passes away, the loan will need to be paid off. In most cases, the homeowners heirs or estate will sell the home and hope to make enough money from the sale to satisfy the reverse mortgage debt. However, if the home does not sell for enough money to satisfy the reverse mortgage debt, the FHA will take a loss and the heirs/relatives/estate will not be held responsible.
The biggest benefit of choosing a reverse mortgage over a caregiver/intra-family loan is that it keeps the family out of it, reducing the risk of stress and family arguments over money. With a reverse mortgage, the loan stays between the lender and the homeowner. Naturally, if the homeowners relatives just want to help the homeowner out by lending them money on a regular basis, they can still do that.
The bottom line is, no matter what type of arrangement you wish to make, always research the options and talk to a financial advisor before making a decision. After all, what’s best for one person may not necessarily be best for everyone.
Learn more about how people are using home equity conversion mortgages for purchasing homes:
Please keep in mind that the reverse mortgage industry is constantly changing and some of the information contained on this site may not be current. Please ask a licensed reverse mortgage professional for up-to-date guidelines.