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 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 most likely approve the transaction.

After all, if HUD realizes that they will spend as much or more to foreclose and take the property then market and sell it, it is also in their best interest to allow the sale if they believe it to be a bona fide transaction.

Top FAQ’s

Q.

Can I buy a house with a reverse mortgage on it?

Yes, you can but the loan is due and payable and must be repaid.  This is often overlooked at times when someone buys a home at auction (especially an HOA auction) where the purchaser thinks they are getting a very low price, only to find out later there is a reverse mortgage on the home.  Then to make matters worse, the outstanding balance on the reverse mortgage may be equal to the value of the home but even if not, that loan is due and payable and the purchaser has no additional funds with which to pay the loan off.  If you plan to buy a home that has an existing reverse mortgage, just remember that the loan will need to be paid in full after the original borrower sells the property pursuant to the terms of the legal documents.
Q.

Can you sell a house when you have a reverse mortgage?

You can sell the home and pay the loan off with no prepayment penalty any time you like.  You own the home and it is your complete right to sell it at any time you choose.
Q.

Can you transfer a reverse mortgage to a new home?

Reverse mortgages are not transferrable.  You can only have one reverse mortgage at a time because it must be on your primary residence.  If you sell your primary residence or otherwise move from your primary residence, that loan becomes due and payable and once it is paid in full, you are eligible to receive a new reverse mortgage on the new property (subject to your qualifications and the property also qualifying under the program eligibility requirements).
Q.

How do you buy a house back after reverse mortgage?

Reverse mortgage borrowers do not need to “buy back” their home after a reverse mortgage because they never sold it.  Borrowers always own their home with a reverse mortgage.  A reverse mortgage is a loan and just like every other loan, you are using the property as security for the loan.  The loan is a lien against the home until it is repaid, (as would be the case when you sell the home, refinance it or otherwise pay the loan off with other funds).  But since you own the home, the title stays in your name throughout the process.
Q.

What is a short sale on a reverse mortgage?

A reverse mortgage short sale is when the amount owed on the property is higher than the value of the home and the homeowner must seek permission from the lender to sell the property for an amount less than the amount owed on the loan with the lender still accepting the sale proceeds as payment in full for the debt.  There are really not many times it makes sense to approach a lender and request permission to accept terms for a short sale on a reverse mortgaged home.  There is no recourse on a reverse mortgage and if the borrowers have passed and there are no proceeds to be received from the sale for heirs, it is probably best to contact the lender and discuss letting the lender take the property via a Deed in Lieu of Foreclosure rather than going to the expense and time to market the home when there will be no sale proceeds afterward anyway.  If the individual who wishes to keep the home is the borrowers’ heir, there is a provision in the loan that allows the heir to repay the loan at 95% of the outstanding loan balance or 95% of the current market value and that would not be considered a short-sale anyway.  It is not a sale if the heir obtains title through a inheritance.

Every so often borrowers find that they just can’t live in a home any longer (i.e., medical reasons, etc.) and they decide to sell the home not knowing its true value.  Only after they put the home on the market, they find that their pattern of cash extraction, the lack of appreciation in their market and interest accrual after a long time when they have been living payment free has allowed them to live comfortably but also has allowed the loan to rise above the value of the property.  When that happens, they can request that the servicer approve a specific sale transaction that would pay the loan off at less than the full amount owed.  The lender would need to review the terms, determine if it is a bona fide sale between unrelated parties and appraise the property.  Next, HUD would probably need to approve the terms as this would create a claim to the MIP fund for the loss on the payoff amount.  If HUD determines that the circumstances are such that the sale is within acceptable parameters and will result in no more loss than they would experience if they took the property back and sold it themselves, they would probably approve the short-sale offer but the original borrower would not be eligible for other HUD/FHA insured financing unless and until that loss had been repaid.

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Experts Area: Heirs and Maturity