Selling a house with a reverse mortgage is straightforward. We’ll explain how the process works and the most important things to know.
Can you sell a house with a reverse mortgage? Absolutely! The process is usually straightforward, but it can vary depending on the circumstances surrounding the sale.
Before we shed light on this topic, let’s first set the record straight on a few basics. Reverse mortgages are highly misunderstood, which often creates confusion about the topic of selling a house with a reverse mortgage.
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What is a Reverse Mortgage?
A reverse mortgage is a unique home loan designed to give you access to home equity without a mortgage payment and without giving up ownership of your home.
The most popular reverse mortgage in America today is the FHA-insured and regulated home equity conversion mortgage, or HECM (often pronounced heck-um by industry insiders).
The minimum qualifying age for a HECM is 62. If you’re married, only one of you needs to be at least 62. The younger spouse can qualify as a non-borrowing spouse.
No mortgage payments are required as long as at least one borrower (or non-borrowing spouse) lives in the home and pays the property charges. The loan becomes due and payable when the last borrower or non-borrowing spouse permanently leaves the home.
You remain the owner of your home and you’re free to leave it to your heirs. If your heirs wish to keep the home, they can pay off or refinance the loan balance.
If your heirs don’t want the home, they can sell it. Once the house sells, escrow pays off the reverse mortgage, and the remaining equity goes to your heirs.
The HECM is a non-recourse loan, which means FHA covers the shortage if the home isn’t worth enough to settle the entire loan balance.
The HECM is versatile and customizable; proceeds can be taken in the form of a line of credit, lump sum, term or tenure income, or some combination of all of these options.
Homeowners commonly use the proceeds to eliminate mortgage or other consumer debt payments, finance home improvements, supplement income, or supplement retirement assets.
As we’ve covered, a HECM reverse mortgage is basically just a home loan. Therefore, selling a house with a reverse mortgage works just like it would for any other home loan. Any differences in the process usually pertain to settling an estate. We’ll cover the specifics next.
Selling a House With a Reverse Mortgage
A reverse mortgage is best for those who don’t plan to sell their homes any time soon because much of the benefit of a reverse mortgage comes out over time. However, you don’t lose the option to sell if you need to. It’s just a home loan, so you’re not locked into your home and there are no prepayment penalties.
Selling a house with a reverse mortgage works just like it would for any other home loan: you hire a real estate agent, sell the house, and pay off the reverse mortgage balance with the proceeds of the sale. Any remaining equity in the home goes to you.
Don’t forget that a reverse mortgage is non recourse. FHA covers the shortage if your home isn’t worth enough to pay off the entire balance.
Selling a House With a Reverse Mortgage After Someone Dies
Selling a house with a reverse mortgage after someone dies is also straightforward, but there are some important procedures and time limits you need to be aware of.
Remember, the HECM is regulated and insured by FHA, which falls under the Department of Housing and Urban Development (HUD). HUD has specific requirements and timeframes that reverse mortgage servicers have to follow to settle up the reverse mortgage balance.
The reverse mortgage balance is due and payable in full once the last borrower or non-borrowing spouse passes away. Once the servicer learns that all borrowers and/or non-borrowing spouses have died, it will issue a Due and Payable notice to the estate. The servicer will also order an appraisal to determine the current market value of the home. The heirs can order their own appraisal as well.
The heirs have a few different options to settle the reverse mortgage balance:
- Pay the lesser of the loan balance or 95% of the appraised value to keep the home. The heirs can settle the loan balance by refinancing or using other assets such as savings or life insurance proceeds.
- Sell the property, repay the balance, and keep the remaining equity. Selling a house with a reverse mortgage after someone dies is straightforward. It works just like it would with any other type of mortgage. You hire a real estate agent (or sell it yourself), sell the house, and repay the loan balance once the sale closes. Any remaining equity goes into the estate.
- Give the lender a Deed in Lieu of foreclosure. The heirs sign the deed over to the servicer and the servicer sells the property and repays the loan balance.
- Do nothing. The lender uses the foreclosure process to sell the property and repay the loan balance.
So, what are the rules for selling a house with a reverse mortgage after someone dies? First of all, HUD requires the lender to begin foreclosure proceedings if the heirs do not repay the balance in response to the Due and Payable Notice. Foreclosure must begin within 90 days, but no sooner than 30 days after the Due and Payable Notice.
The heirs have an initial window of six months to sell the home. If they’re unsuccessful, they can request up to two 90-day extensions before HUD requires the lender to pursue foreclosure.
Note that the heirs do not lose out on keeping the home because the lender begins foreclosure proceedings. HUD requires lenders to being foreclosure by a certain date, but it doesn’t mean foreclosure is a done deal. The foreclosure process stops once the heirs sell the home and repay the loan balance.
Also, don’t forget that the reverse mortgage is a non recourse loan. The most that will ever have to be repaid is the value of the home, even if it’s not enough to pay off the entire loan balance.
A Few Final Thoughts
As we’ve covered, selling a house with a reverse mortgage is straightforward. If you’re selling to move, the process works just like it would for any other home loan. Hire a real estate agent, sell the house, pay off the reverse mortgage through closing. Any remaining equity goes to you.
If you’re settling an estate, the process is similar to a normal sale, but there are federally-mandated time constraints that apply. It’s important to be proactive and keep your servicer informed about your intentions for the property.
And of course, there are never any prepayment penalties, regardless of why you’re selling the home.
If I sell my home that has a reverse mortgage am I eligible for another one?
Absolutely! You can only have one reverse mortgage at a time, but the current reverse mortgage will be paid off when your home is sold. That frees you up to get a new reverse mortgage on the new home that you purchase.
Are there any penalties if I sell my home with a reverse mortgage?
Nope! There is no prepayment penalty for a HECM reverse mortgage. It’s just a home loan, so it’s paid off through closing once your home sells.
