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.
Can I buy a house with a reverse mortgage on it?
Can you sell a house when you have a reverse mortgage?
Can you transfer a reverse mortgage to a new home?
How do you buy a house back after reverse mortgage?
What is a short sale on a reverse mortgage?
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.
Experts Area: Heirs and Maturity