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?
You have asked a question that covers distinctly different scenarios and the answer to each scenario differs based on the circumstances.
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.
Reverse mortgages are non-recourse
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 true and in fact, is a bit misleading especially if the homeowner has not passed.
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.
Also, if the seller is the original borrower and has not passed, there is no right to repay the loan at 95% of the current market value rather than the amount owed.
If such a provision existed, family members could step in and sell/buy homes every time the market took a downward dip, ensuring a loss to HUD.
Bona fide third party sale
In the event of a sale by the current owner or by heirs to a third party, 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 and HUD are not under any obligation to accept less than the amount owed on the loan under a sale to a third party.
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.
However, if the seller had not passed and there was any question as to the legitimacy of the sale, the approval for repayment at less than the full amount owed may not be granted.
But they still could not obtain a deficiency judgment against the original owner or their estate for any amount they did not receive to repay the loan from the sale. That is the non-recourse nature of the loan.
Selling Upside Down
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).
There is no option for a borrower to simply decide they wanted to move with the expectation that HUD would incur all loss because of their desire to move before they passed or could sell the home for the amount owed.
However, even if the borrower did leave the home when it created a loss on the reverse mortgage, 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.
There also may be other tax implications to the borrower or the estate if they took equity from the home and then left with a balance owing on the loan. Borrowers should always consult with a tax professional before making arbitrary decisions.
Can you sell your home if you have a reverse mortgage?
Yes, you can. A reverse mortgage is just a loan and as the owner of your property you can choose to sell the home and pay off the balance any time you wish to do so. Reverse mortgage loans do not have any prepayment penalties either.
How long do you have to sell a house with a reverse mortgage after death?
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.
Does it take longer to close on a home if the seller had a reverse mortgage?
No, it does not. If you plan to buy a home that currently has a reverse mortgage loan the process on your end will be the same as if they had a conventional loan secured against the property. Upon the conclusion of the transaction that loan is paid off just like any other loan via the seller’s proceeds and then the lien against the home is reconveyed (removed).
Is a reverse mortgage transferable to a buyer?
No, it is not. A reverse mortgage loan is not assumable and therefore must be paid off in full via the sale transaction. That being said, a buyer can use a reverse mortgage (if they are eligible) to purchase the home even if it has a reverse mortgage on it currently in the name of the seller.
If I sell my home that has a reverse mortgage am I eligible for another one?
Yes, if the loan was paid in full as agreed. The only time someone would be barred from getting another reverse mortgage loan in the future is if you defaulted on the last reverse mortgage and allowed a property to go into foreclosure. We have done several loans for customers who got a reverse mortgage on one home and then decided to sell that property and then use the reverse mortgage again to finance their next home.
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