In the 1960s, lenders designed a new type of mortgage aimed to help senior homeowners access the equity in their home. The reverse mortgage, as it’s called, lets you borrow against the equity in your property to receive cash upfront, allowing you to meet living expenses without making a monthly mortgage payment. This is a great situation for seniors who want to live in their homes for the rest of their lives but may struggle to find funds for their retirement.
However, sometimes life has a way of throwing unexpected changes or challenges. Some borrowers may need to relocate into a nursing home or move in with a child for better full-time care. They may just want to move to Naples and soak up the sunshine. Whatever the reason, some buyers need to know about selling a house with a reverse mortgage.
In this piece, we’ll briefly explain reverse mortgages more in-depth and assess whether or not you can sell a house with a reverse mortgage. (Spoiler: You can, but it’s a bit different from selling a house normally.)
A reverse mortgage loan allows homeowners to borrow money from a lender using their home equity as collateral for the loan. When you take out a reverse mortgage, the home’s title remains in your name but you will no longer have monthly mortgage payments. Instead, the loan is repaid with interest and fees when the borrower no longer lives in the home.
A reverse mortgage might sound like free money, but it’s not. There are conditions.
You’re still required to pay property taxes and homeowners insurance, use the property, and keep the house in good condition. Plus, as the reverse mortgage ages, the amount the homeowner owes to the lender increases. Interest and loans accrue to the loan balance every month so as your loan balance increases, your home equity decreases.
Eventually, the homeowners or their heirs will have to pay back the loan in full. Usually, that happens by selling the home.
Yes, you can sell a house with a reverse mortgage at any time, just like with a traditional mortgage. Some homeowners may find they have to sell to repay the loan. A perk of reverse mortgages is that you can repay them at any time without penalty, so the proceeds of the sale are a quick way to pay back the loan. If you make a higher profit than your loan balance, you can keep whatever is left over after paying off the reverse mortgage.
Remember, the reverse mortgage total includes the loan balance, plus interest and fees. If your home has appreciated in value, this may not matter. You can pay off the balance with a small profit. If your property has depreciated, however, selling a home with a reverse mortgage is trickier. If your property sells for the appraised value, the lender receives the proceeds of the sale while mortgage insurance pays for any difference in the loan balance.
In the event that you inherit a reverse mortgaged house that has depreciated in value, you will not have to pay back more than the home is worth, even if more than that is owed. That’s a special provision of the FHA-backed Home Equity Conversion Mortgage (HECM), which makes up 95% of reverse mortgages.
Selling a house with a reverse mortgage isn’t much different from selling a house the traditional way. There are a few differences, however, so we’ll break it down below.
Before selling, you have to know how much you owe. You may be able to access your loan balance online or on a previous statement, but it’s best to contact your lender or servicer to determine the exact amount you’ll need to pay after selling. Make sure you’re aware of any potential fees when closing the loan and get the full payoff quote in writing.
While the lender may assume you’re considering selling the house, this is a good time to formally notify them that is the case.
Once you know how much you owe, a realtor can help you get an idea of how much you can sell your home for. That will help you decide whether selling is worth it. Sometimes the process of selling a home and paying the reverse mortgage is a little complicated, so enlisting an attorney can ensure everything goes smoothly.
Just like you would in any traditional home sale, once you have an idea of the figures, put your home on the market and get ready to show it and sell it. A real estate agent, of course, can help with all of this.
Once you close on the home sale, some (or all) of the proceeds will go to pay off your reverse mortgage. This is where having an attorney will be especially useful. An attorney will help you verify that the right amounts have changed hands and that the lender has closed your account. You’ll receive any excess profit after all liens on your home and any fees are paid off.
There are a few more important things to consider when selling a reverse mortgage home.
If your home is worth less than the balance owed, it may be very difficult to sell your home. Some lenders won’t even allow you to list the property if it’s appraised for lower than the amount owed.
In the event that you can sell your home, you won’t have to pay the difference between your loan balance and the sale price of the home. You’ll only owe the loan balance or 95% of the appraised value, whichever is less. That can help you make the final payment but it’s moot if a lender doesn’t allow you to sell.
That said, these instances are rare, especially in a booming housing market. Most homes appreciate in value over time unless they’re really not well taken care of.
Every homeowner has to consider this when they sell a home. But it’s especially important for reverse mortgage holders because you won’t pocket as much of a profit as you would in a traditional sale. That may make a down payment on your next home more difficult. Plus, because everything has to be settled with the lender before you get your profit, it may take longer to get that liquid cash to buy another home.
Considering many reverse mortgage homeowners are older, they often don’t buy another home and instead relocate to an assisted living home or to a child’s home. Paying off a reverse mortgage will make it easier to pay for often expensive nursing or assisted living care.
For the most part, selling a house with a reverse mortgage is just like a traditional home sale. But there are some important numbers to consider before deciding whether it’s better to sell the home or make arrangements to have someone else take over the mortgage. Hopefully, this guide will help you think through the process and make the right decision for your home.
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