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This is a duplicate question, both that received good answers. Can we combine them somehow?
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For most states, their homesteaded & in their name property is an exempt asset for Medicaid for their lifetime. Now you may need to do an annual "return home" letter or some other paperwork to show intent to return. Medicaid doesn't care if there is a mortgage on the house or if it's owned free & clear.

So they can keep the home in theory. BUT the bigger issue will be in paying the mortgage & all the other items on the property (taxes, insurance, utilities, etc) once mom goes into a NH and onto Medicaid. Medicaid requires a co-pay or their "SOC" (share of cost in Medicaid-speak) of all their monthly income to the NH except for a small personal needs allowance. The PNA runs from $ 35 - 90 a month and depends on your state for the amount. MOM WILL HAVE NO $ FOR ANYTHING HOUSE ANYMORE; all her monthly $ basically goes to NH.

For those with a mortgage most of the time family just does not have the funds to pay on mom's house or really wants to pay a dime on the house, so the house is sold; mortgage paid off and any left over $ is used for their spend-down to qualify for Medicaid.

But your mom is just so underwater on the house, that there will be no $ from the sale. I'm not sure what would be best - to have mom walk on the house and let it go into foreclosure or to go the whole Realtor route and place the house on the market (& maybe get it sold via a short sell if the mortgage holder will allow). Personally I'd walk on the house as mom needs her income to do her co-pay. She's going into a NH and onto Medicaid, it's not like she will need good credit score anymore.

Some states will allow a diversion of some monthly income to pay for house maintenance, etc. if the house is on the market for a period of time. I was told it had to be listed with a Realtor (so is an MLS property) & no FSBO and for a set period of time (3 mos & could be asked for again for another 3 mos) and house has to be empty (no family living in the home) and truly on the market.

If she does a foreclosure, she may end up getting part of the mortgage written off and that will likely have 1099-C Cancellation of Debt income issues for taxes. This is important to be on the lookout for as it is taxable "income" for Medicaid - it can be dealt with but kinda is a PIA & you need a tax pro to do mom's taxes to establish impoverishment if she gets a 1099-C. If your state program does a IRS match up, you need to deal with this for your mom.

Good luck, this is going to be layers of issues to get through.
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What Jeanne said was right. Since the house is underwater, I think I would let the mortgage company have the house if your mother goes into a nursing facility. I don't like shirking on debts, but this debt was not of your making. Your mother would not have money left to pay the mortgage each month if she was able to qualify for Medicaid. Family would have to pay the mortgage, taxes, and upkeep of the house out of pocket.
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With or without mortgages, one house is an exempt asset. But if she has enough income to make those mortgage payments that might be a disqualifying factor.

A related consideration is, who is going to pay the mortgage if Mom goes into a care center? She won't have the income to do so.
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