Buying Home & Seller Has a Reverse Mortgage – Now What?

July 24, 2017 By Michael Branson 28 comments

We are looking to buy a home, and signed a contract for sale for $730,000. The house appraised for just over that amount. Afterwards, we learned that the seller owes more than that ($760,000) on a reverse mortgage. Does HUD/FHA need to approve the sales price before we can close? It seems that because the sales price is within 95% of the amount owed, the seller would be able to complete the transaction. Does HUD/the lender get to keep the difference between what is owed and what the sales price will be?

Are you sure that it is a HUD HECM? That balance seems very high for the HUD loan and while it is possible that it was one of the earlier fixed rate loans for an older borrower with a full draw, it would be very difficult to get that high otherwise unless it was a jumbo or proprietary reverse mortgage and then it is a whole different animal.

I can’t say for sure based on what information I have here. If the loan was done on a proprietary or private program, I could not make the same assurances as to what the options might be.

If it was the HUD program, if the borrowers have passed, the lender would allow the borrower’s heirs to pay the loan off and keep the home at 95% of the current market value but there is no option to sell the home for a short sale and let the heirs keep 5% of the sale proceeds.

If the heirs pay off the reverse mortgage at the 95% of the current market value and sell the home at a later date, they may certainly do so but that would be a completely separate transaction.

I’m not sure what you mean by “does HUD/lender get to keep the difference between what is owed and what the sales price will be” because you indicated that the sales price is less than what is owed.

Since that number is a negative number indicating a loss and not a surplus on the sale, there is nothing left “to keep”.

If the loan is insured by HUD as would be the case with a HUD HECM reverse mortgage, then yes, the lender and ultimately HUD would have to approve the terms of the short sale (short sale being a sale for any amount short of the full amount needed to pay the loan off wherein the owner of the property is not bringing in the money to make the lender whole and is requesting the lender to take the loss and accept the sale price as payment in full).

Lenders always have the prerogative on short sales to approve or deny the terms due to the fact that they want to be sure that the sale is at the current market price, is a bona fide “arms-length” transaction and not simply a transfer between two known parties at an agreed upon price that is less than what the property would bring on the open market that would unduly injure the lender and/or HUD.

Once they determine that the price offered is a fair market price and not a below market price for the property and that the sale is in their best interests as well, they will approve the transaction.

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28 Comments on this Article

Nina
January 20th, 2021

My Mother has a reverse mortgage. The house was built on near surface clay and was "repaired" in 2002 prior to the reverse mortgage. The repair failed and there is major structural damage. I would like to buy the house and property, but the value is significantly less than the mortgage value. Think $200k reverse mortgage with home valued at $50k. Will the bank let me buy the house for value versus what is owed?
Reply to Nina
- ARLO™
  January 20th, 2021
  
  Hello Nina,
  
  If your mother has passed, as the heir you have the right to pay off the loan at the lower of the amount owed or 95% of the current market value as established by an FHA approved appraiser.
  If your mother is still living, HUD will not allow a short sale to a family member at this time at 25% of the amount owed.
  Reply to ARLO
Judith T.
December 28th, 2020

Hi ARLO,
I am interested in a property that had a reverse mortgage. The property is supposed to go into foreclosure or auction. I am aware the condo management co holds the title, but they say they do not know who holds the mortgage. How can I get the name of the mortgage holder? Thank you for your time!
Reply to Judith
- ARLO™
  December 28th, 2020
  
  Hello Judith,
  If the property has not gone into foreclosure yet, the lender does not yet own it and would not be able to give you any information whatsoever about the status of the loan.
  If you want to try to do something before the foreclosure date, you need to try to contact any living relatives to see if they wish to sell the property before the foreclosure action.
  Until that time, the home is still owned by the original owner, their estate, or their heir(s).
  You can always wait until the loan does go to foreclosure sale and then purchase at the foreclosure sale or try to negotiate a sale with the lender after the lender takes the property via a Trustee's Deed because of that sale.
  If you bid at the foreclosure sale, you may need to bid against other buyers as well or the opening bid may be too high as it will be the amount owed to the lender and that may be higher than the property is worth.
  You can wait and watch for the statutory notices of the foreclosure. Until a foreclosure action is complete and the lender obtains title, the owner's heirs still own the home and may be looking for financing on the home now and can pay off the loan at any time.
  Creditors are required to advertise potential sales through advertising, typically for 4 weeks or more in local newspapers where the sheriff's sales are advertised in that area.
  You can find out what paper(s) carry the advertisements of the auctions in your area and watch for the notices on the property in which you are interested and can show up at the auction and bid at that time but as I said, the lender is forbidden by financial privacy laws to give you any direct information about the loan or status otherwise.
  If the loan is not paid off by the foreclosure date and no outside bidder bids higher than the lender's original bid at the foreclosure auction (the amount owed on the loan plus any foreclosure costs), then the property will become real estate owned of the lender and the lender can sell the home at whatever price they and HUD determine best at that time.
  HUD must approve any purchase prices that would result in a loss on the loan (any amount less than payment in full on the outstanding balance on the reverse mortgage) as that would result in a claim that HUD would be required to pay.
  Reply to ARLO
Miami
November 30th, 2020

Hello! I have found a house I wish to purchase whose owner recently passed. The house is going to be put up for auction, but I was wondering if there is any way around that. Could I speak to someone at the bank and purchase the house outright without having to go through the auction process? Could I get a loan, buy the house, and not have to worry about investors wanting to flip it?
Reply to Miami
- ARLO™
  November 30th, 2020
  
  Hello Miami,
  
  The only way you could accomplish that would be to contact the heirs of the deceased property owner and negotiate a sale before the lender forecloses on the property.
  The only entity who can sell you the property now is the rightful heir of the person who owned it.
  The lender cannot sell it to you prior to the foreclosure auction because they do not own it. If it does go all the way to foreclosure auction, the auction will take place with the initial bid being the lender's bid of what is owed on the loan plus any foreclosure costs.
  If no one bids higher, the property will go to the lender by Trustee's sale and Trustee's Deed.
  If the lender is outbid on their opening bid, the lender cannot raise the bid, they are then out of the auction and the party with the highest bid will win the property.
  If the lender becomes the new owner, they will go through the Real Estate Owned process with HUD and the property will be sold in accordance with HUD direction.
  Reply to ARLO
Mia
November 24th, 2020

Good morning Arlo! I am looking for a home in a particular neighborhood, and prices have been outrageous. We recently received a message through our neighborhood app saying that a neighbor had a recently passed and their house was a reverse mortgage. Is there any way to see if the house is going to go up for sale anytime soon? Per the person who we spoke to, the owner of the home did not have any family to speak of. Thank you for your time!
Reply to Mia
- ARLO™
  November 24th, 2020
  
  Hello Mia,
  
  The home may or may not go up for sale and the lender cannot give you any information about the loan.
  However, I can tell you that the heirs have the right to keep or sell the home.
  If they do not wish to keep it or sell it, or there are no heirs, the lender will need to foreclose to take possession of the property. If you are able, there may be an opportunity at a foreclosure sale.
  The opening bid would be the amount owed to the lender. You need to watch the papers or online notices for foreclosure sales to see if the property comes up and at what amount.
  If the opening bid is higher than you believe it is worth or are willing to pay, you might still be able to purchase the home when the home is listed by the lender for sale after they take ownership through the auction.
  If the starting auction price is over the market value, you would not be the only ones unwilling to buy at that starting price and the lender would be pretty assured of winning the auction.
  If the amount owed is below the market value, there may be others also bidding at the auction though.
  Reply to ARLO
Moriah
September 8th, 2020

Hi Arlo, Thank you for this blog. It has been very informative. So, my grandparents live in a house with a reverse mortgage on it. I want to purchase the house, and allow them to stay there, and move in, and help them. What does this process look like? Is this possible? What do I have to look out for? I am not sure how much they owe, or how much interest has accrued, but should I go through a real estate agent or a lawyer? My grandparents are okay with selling me the house. Thank you for your help.
Reply to Moriah
- ARLO™
  September 8th, 2020
  
  Hello Moriah,
  
  It is hard for me to advise you here. I for one would not incur the full cost of real estate broker for a simple family transfer but would want to open an escrow and title order so that the transaction was an insured transaction.
  This would mean that you would have professionals who work with title changes and loan payoffs handling this aspect of your transaction.
  It would make it so much easier for the payoff of the reverse mortgage and for you for the future if your sale transaction is an insured transaction (and it you are going to finance your purchase a new lender would require it).
  If you have any other family members (aunts or uncles who are children of your grandparents, other siblings or cousins) you may want to have an attorney structure the sale just so that there are no possible issues later if someone thinks they didn't get something they should have (sad, but it happens all the time).
  An attorney can certainly advise you on what the best way to handle the transaction so that there can be no family issues later. That would need to be your preference and you know your family situation.
  If you are going to consider using a real estate broker, I would certainly approach one and tell them you will agree to a flat fee well below their standard 6% just to handle the paperwork.
  
  As for the balance, all you need to do is get hold of your grandparents' latest statement and it will tell you the balance owed on the loan.
  It will also tell you what the amount of interest that accrues on a monthly basis and give you an idea of what the balance will be for the next couple months as well as you add interest to the existing balance.
  Your numbers will not be exact unless you know how to compute mortgage accrual, but it will be close enough so that you can make some decisions and plans.
  Reply to ARLO
D. M.
May 3rd, 2020

I am the Administrator of an Estate. The property was had a reverse mortgage and almost 40k in code violations. I tried negotiating a short sale and had a buyer with a fair offer within 40k of the lender's BPO and revised offer at their requested counter amount, yet the lender took the property to auction and took the property back for 30k less than the buyer's revised offer. Am I missing something here, seems like they never intended on accepting an offer?
Reply to D.
- ARLO™
  May 3rd, 2020
  
  Good afternoon,
  
  I obviously cannot comment on their reasons for what they did but I can comment on a couple of things here.
  Firstly, if there is a claim to be paid, HUD must be involved, and the lender may not have had the option to just accept your buyer's offer. And secondly, the auction that gives the property back to a lender is regulated by strict rules.
  The opening bid is the lender's and it is comprised of the amount owed; any amounts forwarded by the lender on behalf of the borrower plus any fees to foreclose. If this amount is higher than the value of the property, the chances are that no one bid against the lender and the lender obtained the property for the opening bid. If anyone does bid higher than the lender, the lender is not permitted to bid against the new bid, the property will go to the highest bidder.
  It does not even need to be underwater for there to be no competing bids in most cases. People who buy properties at foreclosure auctions are looking for good deals and do not always know the total story about the property and its condition.
  If the value is even close, even though it may still be selling for less than full market value, most investors probably would not be interested no knowing what else may be wrong and without a solid profit margin.
  
  When the lender took back the property, that just means no one bid higher at auction. The lender or HUD are not required to accept the short sale that would not pay the loan in full and perhaps they felt the value was higher based on their inspections/appraisals.
  If for any reason they feel that the sale was not a bona fide sale and that there was some connection between buyer and seller, they may have rejected the sale. And, they may have just blown it and missed the opportunity to mitigate more of the loss! We will never know because we are not privy to the thought process behind their decision.
  Reply to ARLO
Ciara
April 23rd, 2020

I live with my grandmother who has a reverse mortgage on her house, I am interested in buying it. Since it is before her death, would the company handling her account still be looking for the full loan balance due, or could I buy it for the 95% market value? (the current loan balance is more that what the house is valued at)
Reply to Ciara
- ARLO™
  April 27th, 2020
  
  Hello Ciara,
  HUD has this option so that when a borrower passes, the heirs can choose to keep the home and repay the loan at the approximate amount that the lender/HUD would expect to get in a sale on the open market anyway. They do not typically allow borrower's heirs to come in and "time the market" so that they can pay off the loan at below the amount owed while the borrower is still alive and living in the property. If they engaged in this practice, people would be forever paying off the homes at downturns and "writing off" the paper losses that show at that time before the market can recover.
  If your grandmother is leaving the home permanently due to health needs, etc., you may find the lender and HUD are more willing to work with you at that time. If they realize that this loan will come to an end one way or the other at this time and this is an opportunity to mitigate losses by allowing you to purchase from your grandmother as she leaves, then they may be willing to allow the alternate pay off. You would need to contact the servicer with your grandmother, explain the circumstances for her plans/need to vacate the property and make the request.
  Reply to ARLO
Mike C.
November 20th, 2019

I'm interested in purchasing a home that has a reverse mortgage on it. From what I am told there is no one left alive on the loan. Can I assume the loan on this property from the reverse loan lender?
Reply to Mike
- ARLO™
  November 20th, 2019
  
  Hello Mike,
  Reverse mortgages as not assumable. When the last borrower on the loan permanently leaves the property, the loan becomes due and payable and must be repaid at that time.
  Reply to ARLO
Ramona
September 15th, 2019

My mom wants to sell me and my daughter the house for just the price that she owes the reverse mortgage for. Can we take out a loan just for that in order to pay the reverse mortgage back?
Reply to Ramona
- ARLO™
  September 15th, 2019
  
  Hello Ramona,
  
  There are no restrictions as far as the reverse mortgage goes about for what amount your mom can sell the home to you and your daughter. If you can repay the loan, there is no requirement for any lender or HUD approval on the transaction.
  With regard to loan programs available to you and your daughter, I am sorry I do not stay abreast of forward lending programs and I would advise you to contact a lender working with those programs to see what you will need to finance the purchase (we do only reverse mortgages and I would not want to give you bad information since the last forward loan we closed was over 12 years ago).
  I would guess you will need at least a 5% down payment to do a "purchase" but perhaps you could arrange for an inheritance gift and a refinance with a healthy equity position that does not require the down payment the purchase would. I would ask your lender about those different options.
  Reply to ARLO
Susan B.
June 26th, 2019

We are looking at a home that has been vacated and has signs to call the reverse mortgaging service department. We would like to possibly buy it if it is going into foreclosure. How do we find out more information?
Reply to Susan
- ARLO™
  June 26th, 2019
  
  Hello Susan,
  
  Did you try calling the reverse mortgage servicing department? If it is just going into foreclosure, the lender does not own it and they cannot sell you what they do not own. If it is already owned by the lender or HUD, they can negotiate the sale of the property with you. If the owners are still in the area, you may be able to find their information by doing a search of public records. You would have to search the records to see who owns the property (any title company can tell you if you are not sure how to do it) and then try searching for the individual online to see if you can locate them still in the area or their family. If you can negotiate a sale and pay off the loan before foreclosure, you may be able to save the costs for the family which might equate to a lower price for you.
  Reply to ARLO
Rag
February 13th, 2019

Husband wants to buy his mother's house that has a reverse mortgage how does reverse mortgage work in order to buy her home
Reply to Rag
- ARLO™
  February 13th, 2019
  
  I am not sure I understand the nature of the question. Are you asking if he can buy the house from the lender or from mom? If mom still owns the home, she sells him the home the same as she would if she had any other loan. They determine a purchase price, enter escrow and close the transaction. The loan will be due and payable when mom no longer owns the home, so he does have to have his financing in place to pay off the reverse mortgage at the close of the transaction.
  
  If mom has passed, she (or more accurately her estate) still owns the home if she has not already put a vehicle such as a trust in place that would transfer title in the event of her passing. In that case, the loan is now due and payable, but your husband only must worry about "purchasing" the home if he is not the one who would be the new title holder.
  If there are other heirs also involved, he would have to negotiate that with them. Again, he must have his own financing in place to retire the reverse mortgage that is now due and payable. And keep in mind, if the loan balance is greater than the property value in this case, the heir(s) can pay off the loan for the existing balance or 95% of the current market value of the home, whichever is less.
  
  If the loan became due and payable and no one stepped in to repay the loan and it did go all the way to foreclosure sale, then whoever bought the property at foreclosure sale, whether that is the lender or another party, would now own the property and could sell the home for whatever terms they wished at this point. Once the home is owned by someone other than the original owner after a foreclosure, the new owner can keep, sell or do whatever they wish with the property.
  Reply to ARLO
Diana
September 17th, 2018

We have made an offer on a house with a reverse mortgage the owners attorney has POA and has accepted our offer. We were told the reverse mortgage company has to sign off on a third party review as it is a short sale. It has now been 10 days. How long does the 3rd party review normally take?
Reply to Diana
- ARLO™
  September 18th, 2018
  
  Hello Diana,
  I wish I could give you an exact timeframe but I can't. I would just advise that you stay on top of them and keep the pressure on. You see, they have to keep HUD involved in this process as well because HUD will pay a claim for any amounts that are less than the amount owed. Therefore, the lender and servicer (if they are not one and the same) must perform certain tasks and receive certain approvals before they can proceed if they want to make certain to receive the HUD insurance payment on any shortfall. This means that you may have to be persistent and patient while the wheels of government slowly grind. In this case, I don't even know whose 3rd party they await at this point. It could be for a value estimate. It could be for HUD to determine the loss they will accept at this time. It could be for attorney review of something else entirely. Stay focused and keep up the intensity and I wish you the best.
  Reply to ARLO
Gerri Donnici
July 14th, 2018

I need to meet or talk to someone about purchasing my dad's home that is on Reverse mortgage. I am his DPOA and he is currently in a facility. My mother passed away November 2016. This process is very confusing and I just want to make sure I am well informed while making this decision. Currently home is under Novad//HUD.
Thanks
Gerri Donnici
Reply to Gerri
- ARLO™
  July 16th, 2018
  
  Hi Gerri,
  You don't have to "purchase" dad's home, dad still owns it. Now that dad is no longer living in the home as his permanent residence, the loan will be called due and payable at some point so you just need to decide what you want to do with the house. Your decision will be whether or not you want to pay off the loan and keep the house (you can pay the loan off with funds available to you or with a new loan), or sell the home and pay the loan off, or if there is no equity left if the home, walk away and let the lender dispose of the property.
  The first thing you should do is look at your father's latest statement and see what he owes on the loan. Then check to see what the homes are selling for in the area for similar properties. Now you will know if there is any equity currently left in the home and can make your decision knowing the financial status of the home.
  If the home has a lot of equity, you can choose to pay off the loan and keep the home or you can choose to list the home and sell it. If the balance on the loan is higher than the property's current value but you still would like to keep the home, as the heir, you have the option to pay off the existing loan at 95% of the current market value. You can also choose to remove all of dad's personal property and let the lender take the home because the lender has no other recourse than to take the home and can look to no other assets for repayment. In other words, you don't have to do anything if you do not want to.
  Since the lender cannot look to any other assets to repay the obligation, if you remove all of dad's personal effects and "broom clean" the home, the lender would probably accept a deed in lieu of foreclosure which would resolve the whole issue a lot faster if that's what you would like to do but in any case you can sell, keep or walk away from the home. Broom cleaning means you don't have to hire a crew to go in and completely scour the home. You just need to have all personal effects removed and the home has to be empty.
  Reply to ARLO
Herbert brooks
December 30th, 2017

How can I buy a home that had a reverse mortgage and the owned died.
Reply to Herbert
- ARLO™
  January 23rd, 2018
  
  Hello Herbert,
  
  The property first goes to the heirs of the borrower(s). They have the opportunity to decide if they want to keep it or sell it. The could opt to just allow the lender to take the home back in a foreclosure action if they are not interested in retaining the property. You would have to try to locate the heirs to see what their plans are, watch for foreclosure notices and possible public sale or wait until it came on the market.
  Reply to ARLO

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