Is it true that if an inheritor or owner of a reverse mortgage decides to sell the home, and asks less than the amount of the loan, that the reverse mortgage company holding the note cannot request more than the amount the seller asked? – Debbie
The answer is yes and no. You have asked a question that actually covers distinctly different scenarios. 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.
It is true that the reverse mortgage is a non-recourse loan and the lender cannot look to other assets to repay the obligation. However, when you say that they can “never request more than the seller asked“, that would not be entirely true.
The seller could not ask a sales price well below the current market value and expect to be able to sell to say, a family member or friend, at half the current market value and think that they would be able to complete the sale at that amount and the lender would be forced to accept it.
The lender would obtain an appraisal on the home and any payoff amount less than the full mortgage balance would be dependent on that current appraised value or they could still exercise their right to foreclose on the mortgage.
The lender would accept any offers near current value since they would not want to have to turn around and market the property anyway to achieve the same or near the same sales price. But they still could not obtain a deficiency judgment.
The second circumstance is if the original borrower decided to sell the home but the value was now well below the outstanding balance, the borrower would still be responsible for the outstanding loan balance (just as any borrower would be on any home they sold).
However, the second half of the answer is still the same, that there can be no deficiency judgment if the borrower decided to move or had to move but was unable to pay the balance of the mortgage.
In other words, the loan would go into default and the borrower would go through foreclosure, but there would be no deficiency judgment forcing the borrower to pay any amount the lender could not recoup through foreclosure sale.
This would not be a healthy alternative for most borrowers as they would then have to pay to live somewhere else and their credit would be adversely affected (as well as they would not be eligible for any other FHA-insured loans until any losses had been repaid).
For borrowers moving permanently in assisted living or nursing homes, this may not even be a consideration. For borrowers desiring to purchase again and who are still active and rely on good credit, this may be a bad choice with lasting repercussions.