How to sell a home that has a reverse mortgage
Conditions of a reverse mortgage sale
- Living co-borrowers can stay in the home even if another borrower dies or lives elsewhere.
- Once all borrowers are deceased, the reverse mortgage loan must be paid.
- With HECMs, borrowers and their heirs never owe more than the loan balance, even if the home is underwater.
Reverse mortgages are a type of loan available to homeowners who are at least 62 years old, allowing them to turn their home equity — the difference between the market value and the mortgage balance — into cash for a variety of purposes. The borrowed equity must be repaid eventually, which will be an issue if the house needs to be sold.
There are essentially two reasons why homes with reverse mortgages are sold — either all living borrowers move out of the home permanently, or all living borrowers are deceased and their heirs choose not to keep the property.
If any borrowers are alive
There are three types of reverse mortgages. About 90 percent of the reverse mortgage market is comprised of insured loans through the Federal Housing Administration’s Home Equity Conversion Mortgage (HECM) program. The remaining percentage of reverse mortgages are uninsured, either through a single-purpose loan, sometimes known as a property tax deferral, or through a proprietary loan from a private lender.
Regardless of which type of reverse mortgage you have, the process is roughly the same if you plan to sell the home. First, it’s important to note that a spouse, domestic partner or anyone else who is a co-borrower may stay in the home even if one co-borrower lives elsewhere. For example, a husband may continue living in the home even after his wife permanently moves to a nursing home or assisted-living facility. A permanent move is defined as a period of 12 months; anything less does not affect eligibility.
However, any children, relatives or roommates living in the home who are not borrowers would be forced to move if a borrower did not reside there.
The actual process for selling a home and repaying a reverse mortgage is fairly straightforward. Start by estimating how much money is owed. Reverse mortgages are paid out through installments, and the amount owed is based solely on what has been distributed, plus interest and lender fees. If the reverse mortgage is underwater, meaning the amount owed is more than the market value of the home, it may be difficult to sell. Otherwise, initiate the sales process — a licensed realtor and a real estate attorney can help in reverse-mortgage cases — and pay off all loans and liens once the home is sold. Any money left over is yours to keep.
What happens if your reverse mortgage balance is larger than the home’s value? If you have a HECM, the lender will recoup what they’re owed through sale proceeds, and the FHA will cover any remaining balance. However, loans that aren’t FHA insured may have different terms, so it’s important to understand what they are.
Reverse mortgages are nonrecourse loans, meaning lenders have no way to recoup them other than through the value of the home. Government benefits such as Social Security or Medicare shouldn’t be affected by a reverse mortgage, though need-based programs like Medicaid can be. A financial adviser can sort out the tax and benefit implications of a reverse mortgage.
If all borrowers are deceased
Surviving heirs have a simple first step after a parent or other relative passes away: Notify the reverse mortgage lender, who will direct the process of paying off the loan.
Typically, heirs will have six months to pay the loan. The more quickly they do so, the more they’ll benefit, since interest and insurance premiums continue to accrue
Heirs may keep the home if they’re able to pay the entire loan balance. If they can’t pay immediately with cash, they may qualify for a new mortgage and purchase the home. If a HECM is underwater, heirs can pay 95 percent of the appraised value and insurance will pay the rest to fulfill the loan. They may have to pay the full appraised value for a non-HECM loan.
An heir’s decision to keep the home may rest on the amount of equity available. If there is little to no equity, he or she can sign a deed in lieu of foreclosure, giving the home to the lender. But if there is significant equity and the heirs wish to sell the home, the process becomes less complicated as long as they complete a sale within six months. Heirs can file for two 90-day extensions if the home remains on the market past that point.
Again, because reverse mortgages are nonrecourse, a lender cannot go after an heir’s assets.