What Is A Reverse Mortgage?
The most common reason why people enact reverse mortgages is they want to retire. A reverse mortgage enables the home seller to change their home’s equity into a lien, which allows them to receive monthly payments.
Generally, to get a reverse mortgage, a borrower must be at least 62 years of age, occupy the property as his or her principal residence, and have substantial equity in the property or own the home outright.
With a traditional mortgage when buying a home, every payment you make results in gaining equity in that property. With a reverse mortgage, in exchange for incremental payments to you, you give off small amounts of equity in your property.
It’s important to note: When you take out a reverse mortgage your property’s title remains in your name. You remain the owner, meaning you’re well within your rights to sell your house.
Selling a home that’s tied to a reverse mortgage is similar to selling a property with a traditional “forward
mortgage. When selling a property with a regular mortgage you need to pay the full amount that you owe on your mortgage. It’s the same with a reverse mortgage.
How is a reverse mortgage different from a traditional mortgage?
With a traditional mortgage when buying a home, every payment you make results in gaining equity in that property. With a reverse mortgage, in exchange for incremental payments to you, you give off small amounts of equity in your property. The money you get usually is tax-free. Generally, you don’t have to pay back the money for as long as you live in your home. When you die, sell your home, or move out, you, your spouse, or your estate would repay the loan. Sometimes that means selling the home to get money to repay the loan.
Selling Your Home With a Reverse Mortgage
There are a few crucial details that are involved in reverse mortgages when it comes to selling.
To sell your house as is, you’ll need to have a clear idea of how much you owe on your reverse mortgage versus how much your property is currently worth. Those numbers will directly affect how much your lender will be likely to accept as a payoff.
The lender will often accept 95% of your home’s appraisal value or your entire loan balance, whichever is less. A potential hold up in this situation is awaiting the lender’s approved appraisal of the home’s value. Until you have that appraisal, you can’t know for certain what amount your lender will be willing to accept as a payoff.
Selling your home with a reverse mortgage is significantly easier if your property has increased in value over time. In this case, you’ll have enough equity you can use to pay off the loan, and the situation has significantly less red tape.
It’s a bit trickier if your home’s value has dropped over time to a value less than what you owe the lender. For example, your real estate broker can’t list a property for a price that is less than what you owe your lender. The only way out of this complication is to make up the difference at the time of the sale. Unfortunately this means walking away with less money in your pocket.
Short Sale with a Reverse Mortgage
With a short sale, you will sell your home for less than what you owe on your reverse mortgage. “With a reverse mortgage, the lender cannot go after you or your heirs for the difference between the outstanding loan amount and the final sales price”.
However, you will need the “lender’s buy in” for you to list your property at a lower price. It’s likely that they will require an appraisal to verify the value before they agree that you can list your home reverse mortgage.
Foreclosures frequently don’t make financial sense for any mortgage lender, forward or reverse. If your reverse mortgage lender has to choose between you opting for mortgage default and foreclosure or a short sale, the sale might win. Reverse mortgages are also nonrecourse loans, meaning lenders can’t pursue borrowers for negative loan balances after a foreclosure sale. If you want to short sell your reverse-mortgaged home and are prepared to go through foreclosure if you must, you’re in a relatively strong bargaining position with your lender.
In most cases, if the owner has passed and the sale is for the true market value, the short sale would most likely be approved because if that was the value at which HUD or the lender believe they too would be forced to sell the home, there is no reason to go to the added expense and time to foreclose and market the property.
What Happens If You’ve Inherited a House with a Reverse Mortgage?
Under a HECM, those who inherit a home that’s subject to a reverse mortgage get four options.
- Pay back the loan.
- Sell the home and use the proceeds to repay the reverse mortgage.
- Deed the home to the lender.
- Do nothing and let the lender foreclose.
If you inherit a home that had a reverse mortgage loan you want to get in, contact the loan servicer within 30 days of the borrower’s passing. From there you will need to keep the lines of communication open and if you are trying to sell the property the servicer will give extensions of time in 90 day increments up to a full year if necessary, to get the property sold.
If a borrower passes and the home goes to heirs, the lender will also order an appraisal and if the property is worth less than what is owed on the mortgage, the lender will work with the borrower’s heirs to allow the home to be sold at less than the loan balance. This would be known as a short sale and any such sale would require lender/HUD approval after they received and approved the contract for sale and had appraised the property.
HUD will also allow the heirs to repay the obligation at 95% of the current market value or the amount owed, whichever is less upon the death of the reverse mortgage borrower. This is an option written into the mortgage loan documents and it also requires the lender or HUD to obtain an appraisal of the home.
According to a USA Today article from December 2019, heirs who want to pay off a reverse mortgage and keep the home often face months of red tape and frustration when dealing with the loan servicer. Shoddy loan servicing practices often hinder what should be routine paperwork, debt calculations, and communications with borrowers or heirs. At Bristol Home Buyers, we work with professional short sale negotiators who can take on the bank to make sure that your property sale is given the time and attention that it deserves. Reach out to us today and see how we can help move the process of selling your property with a reverse mortgage as smooth as possible.
In Conclusion
A reverse mortgage is a type of home loan available to mature home owners linked to the equity of the home. When the homeowner passes away or moves from the house, the total of the loan is due – the sum of the payments received and fees. If a home with a reverse mortgage is inherited after the passing of the homeowner, the heirs have options, but it is important for the heir to deal with the mortgage in a timely manner, due to time constraints on the repayment. If the home is no longer worth the total of the loan, the original homeowner or their heirs may work with the bank to complete a short sale. If you are looking to sell your property in Connecticut with a reverse mortgage, call us today or complete the form below for more information!