Some homeowners falsely believe a reverse mortgage puts the bank in control of the house or prohibits them from selling the property on their own time table. And although reverse mortgage fraud is a risk to be aware of and guard against, the truth is selling a house with a reverse mortgage is much like any other home sale. It’s still your house.
But there are a few pressure points: You’ll need to be in close communication with your lender throughout the process to avoid triggering any legal ramifications. If it doesn’t appear that you’re actively marketing the property or miss the deadlines laid out in the agreement, you could face the possibility of foreclosure.
The good news is that if you follow the rules the process can be fairly painless. We got the full rundown from an experienced reverse mortgage professional who helped us lay out the standard procedure in four simple steps.
Non-recourse reverse mortgages protect you from owing more than your home is worth
When you take out a reverse mortgage, the title of the property remains in your name—in other words, you remain the owner no matter what, so you are free to sell the house.
“Selling a home with a reverse mortgage attached is no different than selling a home with a traditional mortgage,” explains Tim Kennedy, a mortgage loan originator and Certified Reverse Mortgage Professional with US Mortgage Corp.
“The lender is paid the balance of what is owed at the time of the sale, and any equity left is then paid to the homeowner or to the heirs.”
With a reverse mortgage, you’re not signing your home over to the bank, you’re just borrowing against the home equity you’ve built up.
This means that you can sell the home and repay the reverse mortgage loan at any time without paying a penalty.
Unfortunately, even though you may be free to sell your home, you might not actually see any proceeds from the sale.
On a traditional mortgage, you’re reducing your debt over time—which in turn reduces the amount of interest you pay over the life of the loan—until the mortgage is paid off.
However, with a reverse mortgage you’re not paying a monthly mortgage payment. So your debt grows rather than shrinks over time. With every month that passes, interest increases your debt—which means it can potentially grow beyond the amount of equity you have in the home.
So, unless you sell the house before your equity runs out, you won’t receive any money from the sale of the house—the balance of the loan plus accrued interest will go to the lender to pay back the reverse mortgage debt.
The good news is that most reverse mortgages are non-recourse loans—especially if you’ve opted for the federally-insured home equity conversion mortgage (HECM), which is the only reverse mortgage backed by the federal government.
This means that neither you or your inheriting heirs will ever be on the hook to pay the lender additional funds above and beyond the value of the house.
Put simply, if the house sells for less than you owe on your non-recourse reverse mortgage, you don’t need to come up with cash to make up the difference.
And here’s some even better news: if your home sells for more than you owe on your reverse mortgage, then any extra money that remains from the home sale after paying back the loan goes to you (or your heirs).
When you have to sell a house because of a reverse mortgage
While you’re free to sell your reverse-mortgaged home whenever you want or need to—there are some scenarios where you’ll have to sell.
These scenarios—which trigger your reverse mortgage coming due—are known as maturity events:
On the plus side, using up all of your home equity is not a maturity event.
This means that even if your reverse mortgage exceeds the available equity before you move out or pass away, you can remain in your home indefinitely without making mortgage payments—as long as it remains your primary residence.
However, you will still need to maintain the property and pay housing expenses including property taxes and HOA fees, or you will trigger a maturity event and be required to pay back the reverse mortgage or sell the house.
4 steps to selling a house with a reverse mortgage
The steps to selling a house with a reverse mortgage are really no different than if you were selling a home with a traditional mortgage.
Step 1: Trigger a maturity event
Since selling the home is a maturity event, that essentially takes care of step one.
Depending on the lender, either the date that you list the house for sale or the date you accept an offer will be considered the date of the maturity event.
However, it’s wise to contact your loan servicer when you decide to sell so you can confirm the loan amount you’ll need to repay. It’s also a wise idea to notify them asap because the list date or offer date are not always the date of the maturity event.
If you’re selling because the borrower has passed away or is no longer residing in the home, then it’s the date that the home was last occupied by the borrower, or the date of death of the last surviving spouse.
Why does the date of the maturity event matter? Check out step two.
Step 2: Contact your loan servicer
Once your loan servicer receives this notification, they’ll send out a “due and payable” letter.
Having sent the “due and payable” letter, the loan servicer will then send out an FHA-approved appraiser to assess the current market of the property.
The amount that’s due to the lender will either be the total debt amount of the reverse mortgage loan or 95% of its current appraised value if the debt amount exceeds the current value.
Whichever amount is lower is the amount due.
After you the borrower (or your estate) receive the “due and payable” letter, you then have 30 days from the date of the letter to respond. If you fail to respond to this letter, your reverse mortgage lender can proceed to foreclose on the home.
After you respond, you move on to step three.
Step 3: Establish a repayment plan
Technically, repayment of the reverse mortgage is due immediately when a maturity event is triggered, say when the borrower sells the house, moves into an assisted care facility, or passes away.
However, depending on the lender and the terms of the loan, you’ll likely have up to six months to repay the reverse mortgage loan.
“The estate has six months to sell the property, with two optional three-month extensions,” explains Kennedy.
“It’s very important to keep the loan servicer advised of the process and demonstrate that the home is being actively marketed or financing is being actively pursued to avoid any legal ramifications.”
Don’t forget that the main legal ramification is foreclosure—which takes the home sale process out of your hands.
So if you need more time, be sure to make your extension request well in advance, and ask for written verification of the extension approvals from your loan servicer.
Step 4: Settle the loan and disperse the proceeds
Just like with a traditional mortgage, once the home sells the proceeds will be distributed at closing—with the necessary funds going toward paying off the reverse mortgage.
When you settle the reverse mortgage loan, you are paying off:
- The principal amount borrowed throughout the reverse mortgage
- The accrued interest on the amount borrowed
- Other unpaid fees (such as mortgage insurance)
“If the balance of the reverse mortgage exceeds the value of the home then the homeowner or the heirs are not responsible to pay this difference, explains Kennedy.
“The good news is a reverse mortgage is a non-recourse loan. Therefore, neither the homeowner nor the estate heirs are responsible for paying back any portion of the loan that has exceeded the appraised value or the sales price.”
If the proceeds from the sale exceed the debt amount owed on the reverse mortgage, then any remaining money (equity) is distributed to the home seller or the estate heirs.
Selling a house with a reverse mortgage? Watch out for these pitfalls
Selling a house with a reverse mortgage may seem complicated, but it’s actually rather simple—as long as you follow the appropriate steps.
“Following the prescribed timeline is vital in order to avoid any legal complications and to keep the lines of communication with the loan servicer open,” advises Kennedy.
“It’s important that you communicate any questions about your reverse mortgage. The loan servicer will always help you through the end of the loan process, so make sure to keep their telephone number or email address someplace convenient.”
One other mistake that inheriting heirs could make is if they pay too much to keep the property.
Remember that if the reverse mortgage debt exceeds the appraisal amount, then the debt is reduced to 95% of the appraised value. This means that an inheriting heir who wishes to hold onto the home can pay off the debt for that 95% of the value.
In simpler terms, if the mortgage debt stands at $150,000 but the home appraises for $100,000, then the debt owed is reduced to $95,000—which means the inheriting heir could purchase the home for $95,000 without needing to pay off the entire $150,000 debt.
The bottom line on selling your house with a reverse mortgage
The complex process it takes to obtain a reverse mortgage—and the loan type’s less than stellar reputation—can make selling a home that has one seem like a daunting undertaking.
But if follow the appropriate steps and seek the advice of a certified reverse mortgage professional, you’ll be able to navigate the process seamlessly. The whole experience will be even easier if you work with an experienced real estate agent who has reverse mortgage experience, such as a seniors real estate specialist.
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