Financing House Expenses

Linda Ershow-Levenberg, Certified Elder Law Attorney (C.E.L.A.)
June 2012, updated August 2020

Elders who require either institutional care in nursing homes or assisted living facilities, or who are trying to remain in their homes in their local communities, face many hurdles when they are short on cash and have only their home as their primary asset. This series of articles explains the use of governmental benefits, private mortgages and reverse mortgages to create a plan to help such clients.

When Homeowner is in Institutional Care

When elderly homeowners go into a nursing home, they don’t “sign over the house.” Furthermore, the State doesn’t “take the house.” However, if the house isn’t being sold, there are carrying costs to be paid: taxes, insurance, water/sewer, lawn maintenance, and utilities. Generally, the house must be listed for sale when a person in a nursing home applies for Medicaid. While it is on the market, it is an unavailable asset.

If the elder has insufficient cash to pay for all of these expenses, there are several options:

Rent the Property

The elder can rent the property and charge a rent which is fair market value and is also sufficient to cover these expenses. If it is rented, the net income above expenses is included in the income that the Medicaid recipient has to pay over to the facility each month. If it is still owned at death, there will be a Medicaid lien against the estate/property.

Home Equity Line of Credit

Write the checks directly to the third party vendor/caregiver/tax assessor.

If there is a pre-existing open Home Equity Line of Credit (HELOC), the elder can use that credit line to pay these expenses. The funds drawn from the HELOC are not “income” under the Medicaid rules, so they can be paid directly to the third party vendor (or tax assessor). However, if the elder is on Medicaid, s/he cannot use his or her income to make monthly payments to the bank on the line of credit.

If there is no pre-existing HELOC, it is rarely feasible to obtain even a small mortgage or home equity loan to provide cash to carry these costs, because underwriting is income-based and the typical elderly applicant is on a limited fixed income.

If the elder needs to apply for a HELOC, s/he will likely need to have a third-party guarantor such as a child. This may not always be feasible, especially if the child has lots of his or her own debt or a poor credit rating. Further, some lenders will not accept a guarantor who is not a partial owner of the real estate. Conveying a partial ownership interest to the child in order to satisfy the lender will raise the specter of a disqualifying gift if a Medicaid application is filed within five years. If the applicant can prove that the conveyance was done exclusively to enable the applicant to obtain a HELOC, the applicant may be able to defeat the presumptive penalty period.

Loans from Family Members

A helpful family member may be able to lend money to the elder for any of these purposes. In these cases, it might be advisable to prepare a conventional Mortgage and Mortgage Note, with a starting balance that reflects the initial amount lent, and an elastic clause indicating that the amount due will include “such other documented amounts that lender has lent to the borrower after the date of execution of this Note.” The mortgage of course, gets recorded with the county clerk.

The loans to the elder are not “income” under the Medicaid rules.

If the elder lacks legal capacity, make sure the Durable Power of Attorney authorizes loans. If it doesn’t, guardianship could be necessary.

At the closing of sale of the property, this mortgage can be paid off, and the remaining funds will be distributed to the seller/elder. The paying of this kind of mortgage should not be treated as a “gift” under Medicaid as long as the entire amount can be validated by receipts and verifications.

When Homeowner Remains in the Home

The options outlined above are also available to the elder who remains in the home.

The funds drawn from the HELOC or funds lent by a family member are not “income” under the Medicaid rules. However, to avoid any build-up of cash in the Medicaid recipient’s account, payments should be paid directly to the third party vendor (or tax assessor).

Reverse mortgages are the main additional option that is available to an elderly homeowner. They may seem expensive, but they are often the only way to free up cash to arrange for 24/7 care in the home. They can enable an elder to stay home for several years.