Although recent television ads might make it seem like reverse mortgages are something new, they actually came into being more than five decades ago—way back in 1961. After some initial problems with the way they were structured, reverse mortgages were systemized by the federal government in 1987 as part of the Home Equity Conversion Mortgage (HECM) Program by the United States Department of Housing and Urban Development Housing and Community Development Act. But even though reverse mortgages have now been around for more than half a century, they are not as well-known or widely used as other types of home financing, such as conventional mortgages. Because of this, homeowners who have reverse mortgages, or those who find themselves inheriting a home with a reverse mortgage, may have questions when the time comes to sell it.
What is a Reverse Mortgage?
A reverse mortgage, also called a home equity conversion mortgage, is the opposite of a “traditional” mortgage. The definition states: “a financial agreement in which a homeowner relinquishes equity in their home in exchange for regular payments, typically to supplement retirement income.” However, this definition can be a bit misleading, since the homeowner does still live in the home, in most cases.
The reverse mortgage is available only to homeowners age 62 and older who own their home outright or only have a small amount financed. With a reverse mortgage, the property owner receives money each month from the equity he or she has accrued in their home, rather than paying down money that is owed on a financed home.
The homeowner is still responsible for all taxes and insurance on the home and must still live on the property. However, until the property is sold or the owner passes away, the owner will continue to receive payments. At that time, the balance of the loan will be owed the reverse mortgage lender.
Can Homeowners with Reverse Mortgages Sell Their Home?
The short answer to this question is yes. Reverse mortgages can be repaid without penalty when selling a home, much like home sellers must repay other types of home loans. The amount necessary to pay off the reverse mortgage will show as a debit on the seller's side of the closing statement. Funds to pay it off will be deducted from the contractual purchase price, along with any other closing costs or fees the seller is paying, with the remaining proceeds of the sale being given to the sellers at the closing of the transaction.
What Should Heirs Know About Selling an Inherited Home that Has a Reverse Mortgage?
Heirs who inherit a home with an existing reverse mortgage can still sell the home, but the process may be somewhat different than selling a home with no mortgage or one with a more commonly used type of financing. Heirs who have recently inherited a home with a reverse mortgage:
- Can expect to receive written notice from the reverse mortgage lender or loan servicer explaining the loan terms and requesting information on the heir's plans for the property.
- Will be required to pay off the loan balance, a figure that, by law, cannot exceed 95% of the appraised value of the home, if selling the home.
- Have the option to sign a deed-in-lieu of foreclosure to the lender in the event that the mortgage balance is more than the current value of the home.
- Generally have six months to decide how to proceed but should know that interest fees and other costs will continue to be deducted during that time, so acting quickly can be an advantage.
Anyone who inherits a home with a reverse mortgage should consider discussing their options with a real estate attorney as soon as possible before deciding upon the best course of action for their particular situation.
What Should These Homeowners Know Before Placing Their Home On The Market?
Sellers who have reverse mortgages likely have been paid money under the terms of the loan prior to placing their home (a log home, perhaps?) on the market for sale. This money, along with any interest charged, lender fees, and any other applicable fees must be paid back before the home sale transaction can be finalized. Sellers who have a reverse mortgage and want to sell their home should contact their lender as soon as they decide to sell and work with the lender to get a formal, written payoff quote.
How Can Homeowners and Heirs Streamline a Home Sale With a Reverse Mortgage?
Home sellers who have concerns about their reverse mortgages and want to help ensure that they will not experience any issues or delays with their home sale transaction should consider seeking the assistance of a real estate listing agent who is a veteran of many such transactions. Listing agents who understand the complexities of reverse mortgages and how they can affect a home sale transaction are better positioned to help their sellers monitor the process and keep it moving forward in a timely manner. This includes getting the correct payoff information from the reverse mortgage lender as soon as possible after the home goes under contract. Doing this allows the title preparers to have the information they need to make sure that all closing statement figures are correct and help to ensure that there are no unpleasant surprises or delays in closing the transaction.