A reverse mortgage is more of a loan than a mortgage, but it can be a pretty favorable type of loan in a couple of ways. Similar to a home equity loan, you can take out your equity in your property in cash. But unlike with a home equity loan, you don’t have to make payments on the loan every month going forward.
TL;DR (Too Long; Didn't Read)
It is possible to sell a home that has a reverse mortgage.
A reverse mortgage does act as a mortgage lien against your property, however. It’s something like selling your home to a reverse mortgage lender as opposed to a homebuyer – but you don’t have to move out. In fact, you can’t move out or your borrowed reverse mortgage balance will come due.
You do have to pay the loan back eventually such as when and if you decide to sell the property. But there’s no built-in prohibition against selling, and the process is much the same as selling a property with a traditional mortgage. There are a few extra steps and considerations, however.
Reverse Mortgage Basics
The vast majority of reverse mortgages are Home Equity Conversion Mortgages, often referred to as HECMs. They’re insured by the Federal Housing Administration. The rules for selling a home with a HECM loan apply to reverse mortgages.
You’re effectively borrowing your equity when you take out a reverse mortgage. For example, your home might be worth $250,000, and maybe you’ve paid off your traditional mortgage entirely – although it’s possible to take out a reverse mortgage if your remaining traditional mortgage balance is small. You can take out up to 60 percent of your equity in the first year of the loan.
You can use a reverse mortgage calculator to help you determine how much you’re eligible to borrow based on your home’s value and other factors.
Other Reverse Mortgage Rules
You can take your equity in a lump sum payment or in monthly installments, but you do have to be at least 62 years old to qualify. Although you’re not obligated to make monthly payments on the amount you’ve borrowed in a reverse mortgage, you do have to continue paying for things like insurance and property taxes. Failing to do so lands you in default of the reverse mortgage's terms.
Your Mortgage Balance Will Increase Over Time
In either case, whether you take a lump sum or periodic payments, interest will begin to accrue on the money you’ve taken as soon as it’s officially in your hands. This means that your outstanding balance will continue to grow over time rather than decrease as it would with a home equity loan or a traditional mortgage.
For example, you might owe $215,000 after a period of time if you took out $200,000 of your equity in a lump sum. You might owe $9,500 if you’ve taken three monthly installments of $3,000 each. Interest is added each month as you go along until the reverse mortgage is paid off, and this eats up your remaining equity so you’ll have less and less equity as time goes by.
Steps Before Selling a Reverse Mortgage Home
Maybe you’ve decided that you want to move to a sunnier climate or a retirement home, or medical or other issues are forcing you into an assisted living facility. In any case, you want to sell. Your first step should be to contact your reverse mortgage lender to ascertain the total balance of your loan to date, including interest and any other lender fees.
You’ll want to get this information in writing as a “payoff quote” – how much you’ll be obligated to repay when you sell your home. Now you can contact a real estate agent to list your home for sale, or you might decide to sell your home without professional assistance – although professional help can be invaluable in this situation.
Your listing price must be enough to cover your outstanding reverse mortgage balance. A real estate agent can do a comparative market analysis on your property and let you know if it’s likely to sell for enough to cover your outstanding reverse mortgage balance. Your reverse mortgage lender will almost certainly have your home appraised as well after you’ve found a buyer and you’ve submitted a signed purchase agreement to them – another mandatory step you must take.
How to Sell a House With a Reverse Mortgage
The closing process will be very similar to selling a home with a traditional mortgage. Your reverse mortgage will be satisfied from the sale proceeds. You’ll receive any balance left over after allowing for closing costs and any other liens against your property that must be satisfied from the proceeds such as a small remaining traditional mortgage balance if you have one.
You should not be charged any prepayment penalty for selling the home. And be sure to follow up with your reverse mortgage lender or the title company a short time after the sale. You’ll want to absolutely be sure that your reverse mortgage was paid off at closing.
A Major Complication
Of course, all this presumes that your home has not somehow lost value over the years so its current appraised value is less than your reverse mortgage balance. By law, your lender can’t list or advertise your property for less than what you owe, just as if you had a traditional mortgage, unless you commit to making up the difference out of pocket. But you do have a couple of other options if you don’t want to or are unable to do this.
An HECM lender must accept 95 percent of your home’s appraised value or your full loan balance, whichever is less. That 95-percent figure can give you a little wiggle room if the offer on your home is at least close to your reverse mortgage balance, but you probably won’t be receiving any cash at closing, which might make relocating difficult.
Consider a Short Sale
You might consider a short sale, which involves getting your reverse mortgage lender’s consent to sell your property for less than your reverse mortgage balance. The lender is prohibited under federal law from pursuing you for payment of any deficiency between the ultimate sales price and what you owe, but you’ll still need the lender’s approval for the sale.
Reverse mortgages are “non-recourse loans.” This means that reverse mortgage lenders can’t turn around and sue you for a $15,000 difference if your home proceeds are $100,000 but your reverse mortgage balance was $115,000. And lenders won’t typically suffer a loss in this situation because these loans are insured by the FHA, which will make up the difference, so they might agree to a short sale if the situation appears hopeless.
A deed in lieu of foreclosure will allow you to simply turn over your home to your lender in exchange for erasing your reverse mortgage debt obligation. This can be an option if you’re in a break-even financial situation with the sale, or if the sale will result in a deficit because you simply can’t sell your home for enough to cover the reverse mortgage balance.
Both short sales and deeds in lieu give the lender options other than the costly and time-consuming process of foreclosure, just as they would with a traditional mortgage. And they can save you the same headaches if you know you’re not going to be able to recoup enough from a sale to cover what you owe and take any cash out of the deal besides.
- American Advisors Group: Can You Sell a Home With a Reverse Mortgage?
- LendingTree: Selling a House With a Reverse Mortgage
- Maximum Exposure Real Estate: How to Sell a Home With a Reverse Mortgage
- National Reverse Mortgage Lenders Association: What Is a Reverse Mortgage?
- Consumer Financial Protection Bureau: Reverse Mortgage Answers
Beverly Bird has worked as a paralegal in the areas of personal finance and bankruptcy for over 20 years. She has been writing professionally for over 30 years.