Neil Sweren's Interesting Points

How do you sell a home that has a reverse mortgage on it?

Recently we have had quite a few questions from realtors wanting to know how to sell a home that has a reverse mortgage on it.  The answer to the question depends on whether or not the property is under water.

If the house IS NOT underwater…

If the loan balance is less than the current property value it is handled like any other sale. There is nothing unusual about paying off a reverse mortgage with one exception: there are certain time constraints the servicer (lender) must – I repeat MUST – follow once the last person on title no longer occupies the home as his/her primary residence. If the property is NOT under water the reverse lender or servicer provides a written payoff to the title agent. At closing the loan balance is paid off – just as it would be with any other lien holder.  After the loan is paid off, any and all remaining equity goes to the seller, which typically is the borrower’s heirs or estate.

If the property IS underwater…

If the loan balance exceeds the property value / sale price it gets a little more complicated. HECM payoffs are not negotiated like other short sales or short payoffs.  The lender must accept 95% of the current appraised value as satisfaction of the lien. HECM loans are non-recourse in nature so the borrower and his/her estate CANNOT be held responsible for any shortfall.  This is true even if the borrower has millions in other assets.  The house repays what it can, and any shortfall is covered by the FHA insurance fund. It is important to understand that this is NOT a short sale… there is no negotiation required or permitted and the lender is prohibited by HUD from accepting any amount less than 95% of the value.

What about non-arm’s length transactions?

The 95% figure noted above holds true for family members also.  If heirs who inherit the property want to keep it, they would be responsible to repay the loan balance subject to a MAXIMUM of 95% of the property value based on the lender’s appraisal. Note that there are time constraints and the clock starts ticking the day the last surviving borrower ceases to occupy the property as a primary residence.

Important note on time frames…

A reverse mortgage technically becomes due and payable on the first day the last surviving borrower no longer occupies the home as his/her primary residence. The clock starts ticking from that date. Under normal circumstances, the borrower or his/her estate have an initial period of six months to pay off the loan. In addition to the initial six months, up to two three-month extensions can be requested (for a total of one year) if more time is needed. Extensions are not automatic; documentation that the home is listed for sale, a sale is pending, etc. will be required in order for an extension to be granted. The lender does not care how the reverse mortgage is paid off, only that it is paid off.  Typically this happens through a sale of the home. However, the loan can also be satisfied by refinancing, cash payoff or other means, if the family desires to keep the property.

Communication is the key

The loan servicer should be contacted IMMEDIATELY!  Reverse mortgage servicers deal with these situations every day and will work with borrowers and family members. However, they can’t help if they don’t hear from anyone. All reverse mortgage servicers send monthly loan statements to borrowers. Those statements should contain all loan and contact information necessary to make contact with the lender.

Filed under: Mortgage, Reverse Mortgage | Tagged: credit, HECM, Home Sales, payoff, real-estate, Reverse Mortgage, reverse mortgage payoff, seniors | Leave a comment »