No, money from a reverse mortgage is not considered income for Medicaid. It is treated as a loan. The primary conflict is a federal procedural rule, SI 00815.350, which dictates how the Social Security Administration treats loan proceeds. This rule creates a devastating trap: any reverse mortgage money you receive but do not spend by the end of the calendar month is reclassified from an exempt loan into a countable asset, which can instantly disqualify you from the long-term care benefits you need.
This hidden danger is significant, especially when you consider that a staggering one in ten reverse mortgages is in default and could face foreclosure.[1] The dream of financial security can quickly become a nightmare of ineligibility and potential home loss. This article will break down exactly how to navigate this perilous intersection of finance and federal benefits.
Here is what you will learn:
- 💡 Why the cash from your reverse mortgage is a ticking time bomb for your Medicaid eligibility and how to defuse it.
- 💰 The single safest way to structure your reverse mortgage payments to access your home’s equity without losing your benefits.
- 🚫 The #1 mistake that forces seniors to spend down their entire reverse mortgage paying for nursing home bills out-of-pocket.
- 📝 A step-by-step guide to legally spending your reverse mortgage money on things you need without triggering Medicaid penalties.
- 🤝 How to use federal “spousal impoverishment” rules to protect a healthy spouse from financial ruin when the other needs long-term care.
The Two Worlds Collide: Deconstructing Reverse Mortgages and Medicaid
To understand the danger, you must first understand the two separate systems involved. One is a complex financial product sold by private lenders, and the other is a rigid government benefits program. Their rules were not designed to work together, and their collision point is where seniors risk their financial future.
Pillar 1: The Reverse Mortgage Machine
A reverse mortgage is a special type of loan for homeowners aged 62 and older.[2, 3] It allows you to convert a portion of your home’s equity—the value of your home minus any existing mortgage—into cash.[4, 5] The most common type is the Home Equity Conversion Mortgage (HECM), which is insured by the Federal Housing Administration (FHA), an agency within the U.S. Department of Housing and Urban Development (HUD).[4, 6]
Unlike a traditional mortgage where you make monthly payments to a lender, a reverse mortgage lender makes payments to you.[6] You do not have to make any monthly loan payments back to the lender.[7] Instead, the loan balance, which includes the cash you receive plus accumulating interest and fees, grows larger over time.[6, 7]
The loan only becomes due and payable when a “maturity event” occurs.[8] This happens when the last surviving borrower dies, sells the home, or moves out for more than 12 consecutive months, such as into a nursing home.[9, 8] You must also continue to pay for property taxes, homeowners insurance, and home maintenance, or you risk defaulting on the loan and facing foreclosure.[3, 10]
Pillar 2: The Medicaid Gauntlet
Medicaid is a joint federal and state program that pays for healthcare for millions of Americans with low income and assets, including the staggering cost of long-term nursing home care.[11] Unlike Medicare, which is an entitlement, Medicaid is “means-tested.” This means you must prove you are financially needy to qualify.[12]
Medicaid has two separate and brutally strict financial tests: one for income and one for assets.
- Income is money you receive on a regular basis, like Social Security, a pension, or IRA distributions.[13, 14] In 2025, the income limit for an individual needing long-term care in most states is around $2,901 per month.[15]
- Assets (also called resources) are things you own that have value, like cash in a bank account, stocks, bonds, and second properties.[16, 17] For an individual, the asset limit in most states is just $2,000.[16, 12]
The Critical Distinction: Countable vs. Exempt Assets
Medicaid does not count everything you own toward that $2,000 limit. Some assets are “exempt,” meaning Medicaid ignores them. The most important exempt assets for seniors are typically the primary home, one vehicle, and personal belongings.[15, 16]
“Countable” assets are what put you at risk. This category includes cash, checking and savings accounts, stocks, and bonds.[17] Having more than $2,000 in countable assets will result in a denial of your Medicaid application.
| Asset Type | Medicaid Treatment |
| Primary Home | Exempt (up to a certain equity value, around $730,000 in most states for 2025) [16] |
| One Vehicle | Exempt [18] |
| Personal Belongings | Exempt [19] |
| Pre-Paid Funeral Plan | Exempt (up to state limits) [20] |
| Cash in Bank Accounts | Countable [16] |
| Stocks, Bonds, Mutual Funds | Countable [16] |
| Second Home / Vacation Property | Countable [17] |
The Ticking Time Bomb: How Reverse Mortgage Cash Becomes a Countable Asset
The core problem is simple: a reverse mortgage converts your largest exempt asset (home equity) into cash, which is a countable asset. While the money is not considered income, it is subject to a rule that can cause instant disqualification.
The “Month of Receipt” Rule Explained
Federal Medicaid and SSI rules state that loan proceeds are not income in the month they are received.[21, 22] However, any of that money that is not spent by 11:59 PM on the last day of that same calendar month is reclassified.[21] On the first day of the next month, it becomes a countable asset.
This rule is an administrative tripwire. Money that is invisible to Medicaid on May 31st becomes a giant red flag on June 1st.
For example, imagine Sarah has $1,800 in her savings account. She draws $500 from her reverse mortgage on May 15th for a car repair. If she pays the mechanic on May 20th, her bank account returns to $1,800, and she remains under the $2,000 asset limit.
But if she waits and pays the mechanic on June 2nd, her bank balance on June 1st would have been $2,300 ($1,800 + $500). This is over the $2,000 limit, making her ineligible for Medicaid for the entire month of June.
Why Your Payout Choice Is the Most Important Decision You Will Make
The way you choose to receive your reverse mortgage funds directly determines how difficult it will be to manage the “month of receipt” rule. This is not a matter of convenience; it is a critical strategic decision.
- Lump Sum: This is the most dangerous option.[12] Taking all your available equity, for example $100,000, in a single payment is a near-guaranteed way to become ineligible for Medicaid.[9, 12] It is almost impossible to spend that much money on permissible items in one month, meaning the massive unspent balance becomes a countable asset the very next month.[22]
- Monthly Payments: This can work, but it requires careful management. If you receive a fixed payment of $800 per month, you must spend that entire $800 every single month.[22, 23] If your expenses change and you start accumulating a surplus, you will quickly go over the asset limit.[22]
- Line of Credit: This is overwhelmingly considered the safest and most flexible option for anyone who might need Medicaid.[22, 24] The undrawn balance of your line of credit is not a countable asset; it is still considered part of your exempt home equity.[21] This allows you to draw only the exact amount you need for expenses each month, spend it down, and avoid any surplus that could jeopardize your eligibility.
Real-World Scenarios: Success and Failure in Action
Seeing how these rules play out in real life makes the stakes crystal clear. Here are three of the most common scenarios families face.
Scenario 1: The Proactive Planner
Mary, an 82-year-old widow, needs help with cooking and cleaning. Her Social Security covers most bills, but she has a $400 monthly shortfall for in-home care. She has $1,500 in savings and wants to protect it.
| Strategic Draw | Medicaid Outcome |
| Mary gets a HECM line of credit. Each month, she draws exactly $400 and immediately pays her caregiver. | Success. Her bank account never goes over the $2,000 asset limit. The large undrawn balance on her credit line remains exempt home equity, and she preserves her future Medicaid eligibility.[23] |
Scenario 2: The Married Couple Crisis
John, 86, has Alzheimer’s and needs immediate nursing home care. His wife, Jane, 83, is healthy and will stay in their home. They have $180,000 in countable assets (savings and investments).
Under federal “Spousal Impoverishment” rules, Jane (the “community spouse”) is allowed to keep a portion of the couple’s assets, called the Community Spouse Resource Allowance (CSRA).[20] In their state, the maximum CSRA for 2025 is $157,920.[20] John, the applicant, is only allowed to have $2,000. This leaves them about $20,000 over the limit for John to qualify.
| Financial Maneuver | Eligibility Result |
| Their elder law attorney advises them to take a $20,000 draw from a new HECM line of credit. They use this cash to purchase a Medicaid Compliant Annuity for Jane. | Success. The annuity converts their excess countable asset ($20,000 cash) into a non-countable income stream for Jane.[20] With their assets now below the limit, John is immediately eligible for Medicaid to pay for his nursing home care. |
Scenario 3: The Lump-Sum Disaster
Bill, 76, is healthy but wants a financial cushion. He gets a fixed-rate reverse mortgage, which requires him to take a $120,000 lump-sum payment. He deposits it into his savings account. A year later, he has a major stroke and needs long-term care.
| Payout Choice | Financial Consequence |
| Bill took the full $120,000 as a lump sum and let it sit in his bank account. | Catastrophic Failure. When he applies for Medicaid, the agency sees his bank balance of over $120,000. He is denied for being drastically over the $2,000 asset limit and is forced to pay for his care privately, depleting the very funds he took out for security.[9, 25] |
The Rules of Engagement: How to Spend Reverse Mortgage Money Without Penalty
If you must draw money from a reverse mortgage, you must spend it correctly. The process of reducing your countable assets to meet Medicaid’s limit is called a “spend down”.[20] The key rule is that you must receive “fair market value” for the money spent; you cannot simply give it away.
What You CAN Spend Money On
Spending the money on yourself or your spouse for legitimate needs is perfectly acceptable. Common allowable expenditures include:
- Paying off Debts: Eliminating a mortgage, car loan, or credit card balances is a primary strategy.[20, 26]
- Home Repairs and Modifications: Investing back into your exempt home is a classic spend-down tactic. This includes a new roof, a furnace, or accessibility upgrades like a walk-in shower.[20, 26]
- Pre-paid Funeral and Burial Plans: Purchasing an irrevocable funeral trust is a specifically permitted way to shelter assets.[20, 26]
- Purchasing a New Vehicle: Since one car is an exempt asset, buying a more reliable vehicle is allowed.[26]
- Personal and Medical Needs: Paying for dental work, new eyeglasses, hearing aids, furniture, or appliances is permissible.[20, 26]
The Ultimate Sin: Gifting and the 5-Year Look-Back Period
The one thing you absolutely cannot do is give the money away. Medicaid assumes any asset transferred for less than fair market value was done to artificially qualify for benefits. To prevent this, states implement a five-year “look-back” period.[27]
The state will scrutinize all financial transactions for the 60 months prior to your Medicaid application. Any gifts made during this time will result in a penalty period, making you ineligible for Medicaid for a certain number of months or years.[16] Giving your son $20,000 from your reverse mortgage to help with a down payment will trigger this penalty and jeopardize your access to care.
Mistakes to Avoid: Common Pitfalls That Lead to Disaster
Navigating this process is complex, and several common mistakes can have severe consequences.
- Taking the Lump Sum: As shown, this is the most frequent and damaging error, instantly converting exempt equity into a massive countable asset.[12]
- Co-mingling Funds: Some states require reverse mortgage proceeds to be kept in a separate, non-commingled bank account. Mixing the funds with your regular savings can complicate tracking and may cause the entire account to be treated as a countable asset.[28]
- Forgetting Property Charges: A reverse mortgage does not eliminate your obligation to pay property taxes and homeowners insurance. Failure to pay these is the leading cause of default and can lead to foreclosure, forcing you to lose your home.[1, 9]
- Ignoring the “Intent to Return” Rule: Your home is only exempt while you live in it or, if you are in a nursing home, you have a documented “intent to return.” If it becomes clear you will never return home, the house can lose its exempt status and its value will be counted as an asset, terminating your Medicaid benefits.[29]
- Paying Back the Loan with Other Assets: This is a complex trap. Some states view using your countable savings to pay down your reverse mortgage as an improper transfer (divestment), because you are converting a countable asset (cash) into an exempt one (home equity) when you are not required to make a payment. This can trigger a penalty period.[28]
Do’s, Don’ts, Pros, and Cons of Using a Reverse Mortgage with Medicaid in Mind
Making an informed decision requires weighing all the factors.
Do’s and Don’ts
| Do’s | Don’ts |
| ✅ DO consult with an experienced elder law attorney before signing anything. Their guidance is essential to avoid catastrophic mistakes. | ❌ DON’T take a lump-sum payment unless you have an immediate, large, and permissible spend-down plan approved by an attorney. |
| ✅ DO choose a line of credit as your payout option. It offers the most safety and flexibility for Medicaid planning. | ❌ DON’T let funds accumulate in your bank account. Spend any money you draw within the same calendar month. |
| ✅ DO keep meticulous records of how you spend every dollar you draw from the reverse mortgage. | ❌ DON’T give the money away to family or friends. This violates the five-year look-back rule and will result in a penalty. |
| ✅ DO continue to pay your property taxes and homeowners insurance on time, every time, to avoid foreclosure. | ❌ DON’T assume the HUD-mandated counseling will cover Medicaid planning. It is designed to explain the loan, not its interaction with benefits. |
| ✅ DO inform your heirs about the reverse mortgage. They will be responsible for repaying the loan after you pass away. | ❌ DON’T forget that moving to a nursing home for over a year will make the entire loan balance due and payable. |
Pros and Cons of a Reverse Mortgage
| Pros | Cons |
| Access to Cash: It provides a way to tap into your home’s equity for living expenses without having to sell your home.[25] | Extremely High Costs: Origination fees, mortgage insurance, and closing costs are substantial and can be double those of a traditional mortgage.[1, 25] |
| No Monthly Payments: You are not required to make monthly loan payments, which can free up cash flow for other needs.[7] | Rapid Equity Depletion: The loan balance grows over time, systematically draining the equity from your home and reducing what your heirs will inherit.[1, 9] |
| Funds are Tax-Free: The money you receive is considered a loan, not income, so it is generally not taxable.[2, 5] | Risk of Foreclosure: Failure to pay property taxes, insurance, or maintain the home can lead to default and foreclosure.[1, 9] |
| Non-Recourse Loan: You or your heirs will never owe more than the value of the home when the loan is repaid, thanks to FHA insurance.[30] | Impact on Heirs: Heirs must repay the full loan balance to keep the home, which often forces them to sell the property.[31, 10] |
| Flexible Payouts: Options like a line of credit can be strategically managed for needs like in-home care.[5] | Medicaid Ineligibility: Improperly managed funds will be counted as an asset, leading to a denial of long-term care benefits.[9, 25] |
The HECM Process: A Step-by-Step Breakdown
If you decide to proceed, understanding the application process is crucial. The most common reverse mortgage, the HECM, has a federally mandated structure.
- Mandatory HUD Counseling: Before you can even apply, you must complete a counseling session with a HUD-approved agency.[3, 32] The counselor will explain how the loan works, the costs, and potential alternatives.[33] Crucially, this counseling is not a substitute for legal advice and will likely not cover the specific nuances of your state’s Medicaid rules.
- Loan Application and Financial Assessment: You will complete an application with a lender. The lender will conduct a financial assessment to verify your ability to pay future property taxes and insurance.[32] This is a key step designed to reduce the risk of default.
- The Life-Expectancy Set-Aside (LESA): If the lender determines you may have trouble paying future property charges, they may require a LESA.[4, 34] This withholds a portion of your loan proceeds in an escrow-like account to cover those future bills. While this protects against default, it also reduces the amount of cash available to you.
- Appraisal and Closing: Your home will be appraised to determine its value, which helps set the maximum loan amount.[9] At closing, you will sign the final loan documents. All upfront costs, such as the origination fee and the initial mortgage insurance premium (MIP), are typically financed into the loan, reducing your net proceeds.[1, 9]
Frequently Asked Questions (FAQs)
1. Does a reverse mortgage count as income for Medicaid?
No. The money is considered a loan proceed, not income. However, unspent funds become a countable asset the next month, which is the primary risk to your eligibility.[12, 22]
2. Can a reverse mortgage make me ineligible for Medicaid?
Yes, absolutely. If you take a lump sum or let monthly payments build up in your bank account, the cash will push you over the asset limit (usually $2,000) and cause a denial.[22, 27]
3. What is the safest way to take reverse mortgage money if I might need Medicaid?
A line of credit is the safest option. The undrawn balance is not a countable asset, and you can draw only what you need each month and spend it immediately.[22]
4. Will a reverse mortgage affect my Social Security or Medicare?
No. Social Security and Medicare are federal entitlement programs, not means-tested. Your income and assets do not affect your eligibility for these benefits, so a reverse mortgage has no impact.[12]
5. What happens if I have a reverse mortgage and need to move into a nursing home?
Moving into a nursing home for more than 12 consecutive months is a maturity event that makes the entire loan balance due and payable. The home often must be sold to repay the loan.[9, 8]
6. Can my children still inherit my house if I have a reverse mortgage?
Yes, but they also inherit the debt. To keep the home, they must repay the full loan balance. Often, they must sell the house to get the funds to pay off the loan.[31, 10]
7. What if my loan balance grows to be more than my home is worth?
You or your heirs will not owe the difference. HECMs are “non-recourse” loans. FHA mortgage insurance covers any shortfall if the home sells for less than the loan balance.[30]
8. Can I use reverse mortgage money to pay my children for helping take care of me?
Yes, but only with a formal, written Personal Care Agreement drafted by an attorney. Simply giving them cash is considered a gift and will trigger a Medicaid penalty period for violating the look-back rule.[20, 26]
9. I already have a reverse mortgage and now need Medicaid. What should I do?
Contact a qualified elder law attorney in your state immediately. This is a crisis situation that requires expert legal advice to see if any spend-down or other strategies can be used to achieve eligibility.
10. Is it a good idea to use a reverse mortgage to pay for long-term care insurance?
This is a very complex strategy that requires professional advice. It involves using an exempt asset (home equity) to fund a product to pay for care, but the high costs of both products must be carefully weighed.