Selling a House with a Reverse Mortgage
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For many seniors, taking out a reverse mortgage is a way to take advantage of the equity they’ve built up while staying in their home for as long as possible. Sometimes, however, there comes a time when they want or need to sell.
You may need to move into a nursing home or move in with relatives. Perhaps you simply want to buy a house in a more convenient location or one that is more accessible. Or maybe you just want to give up your permanent address and travel. Whatever your reasons for wanting to sell your home, the following should help you better understand the process.
Can I sell a home with a reverse mortgage?
In a word, yes. Selling a house with a reverse mortgage is not much different than selling any other home. With a traditional mortgage, when you sell the home, you need to pay off the mortgage in full. The same applies to a reverse mortgage. However, there are a few important details you should be aware of, as the process can be complicated.
Things to be aware of before selling a home with a reverse mortgage
Kelly Parks, a real estate broker with Paris Gibson Realty in Great Falls, Mont., has helped several clients sell homes with reverse mortgages and said the process can be both time-consuming and somewhat confusing.
First, you need to get an idea of how much you owe on the reverse mortgage and how much the home is worth, as those numbers will determine how much your reverse mortgage lender is willing to accept as a payoff.
A reverse mortgage lender will accept 95% of the home’s appraised value, or the full loan balance, whichever is less. “The tricky part,” said Parks, “is that you have to have a buy-sell and send it to the lender before they will order the appraisal.”
The buy-sell agreement, also known as a purchase agreement, is a contract signed by the homebuyer and seller confirming they’ve agreed on a certain purchase price, closing date and other terms. In other words, the buyer and seller have to agree on a sales price before you know the home’s appraised value, and thus what the lender will accept as a payoff.
This typically isn’t an issue if the home has gained value and the homeowner has more than enough equity to pay off the reverse mortgage balance. However, if the home has lost value and is worth less than the balance owed, it can get complicated quickly.
“It’s sort of like putting the cart before the horse,” Parks said. “This can prove downright difficult. I’ve personally spent hours emailing and calling reverse mortgage lenders to find out the status of an appraisal in order to be able to actually list a property.”
As a real estate broker, you cannot list a property for less than the amount owed to the lender, Parks explained, unless you client intends to make up the difference at closing.
“No one wants to do that, therefore, in order to get the short sale value, the property has to be appraised,” she added.
|Selling a home with a reverse mortgage|
When it makes sense to sell a home with a reverse mortgage
It makes sense to sell a home with a reverse mortgage when the value of your home is high enough to cover paying off your reverse mortgage balance and the cost of selling the property, and having enough left over to pocket some cash.
With a traditional mortgage, that’s often the case because you’re paying down the principal balance on your loan while the property appreciates in value. When you sell the home, the remaining mortgage balance and the costs to sell are subtracted from the proceeds, and the homeowner receives the remaining funds.
But with a reverse mortgage, it’s not so simple.
The balance on a traditional mortgage goes up each month as the homeowner receives monthly installments and interest and fees are added to the loan balance. This chips away at the equity in your home over the life of the loan.
Then there are the costs of sale. According to a 2017 analysis from Zillow and Thumbtack, the average U.S. homeowner spends $18,342 to sell a home. These closing costs include real estate transfer taxes and commissions paid to agents. Extra costs can also include expenses like painting, carpet cleaning, lawn care and other projects aimed at getting the house ready to sell.
If you do not have enough equity in your home to pay off the balance of your reverse mortgage and cover closing costs, you may have to pay those costs out-of-pocket.
If you don’t have the savings to cover those costs, your options are somewhat limited. You may consider:
If you are physically able, you can remain in your home and let the lender foreclose on the home after you pass away.
In a short sale, you sell your home for less than the remaining balance on the mortgage. With a reverse mortgage, the lender cannot go after you or your heirs for the difference between the outstanding loan amount and the final sales price.
“It will require the lender’s buy-in before being able to list the home at a lower value,” said April Palomino, a Realtor with Coldwell Banker Residential Real Estate in Winter Park, Fla. “The lender may require an appraisal to be done to confirm the value before agreeing to the listing price.”
Deed-in-lieu of foreclosure
This is a voluntary transfer of your property to the lender in exchange for a release from your debt.
Steps to selling a house with a reverse mortgage
1. Contact your lender
Contact your reverse mortgage lender to confirm the balance owed on the loan and any other lender fees.
“I would also ask for the full payoff quote in writing,” Palomino said. “At this time, inform them that you are planning on selling your home.”
2. Find a real estate agent
Although you don’t have to work with a real estate agent to list your home for sale, Palomino says there are some advantages to working with an agent.
“They will be able to tell you what things you need to fix or update to attract eager buyers and help the home sell more quickly.”
An agent can also help you with marketing the home and negotiating with buyers.
3. Consult a real estate attorney
Because the process of selling your home and paying off the reverse mortgage is so complicated, some buyers hire a real estate attorney to ensure the payoff of the reverse mortgage is handled correctly. However, Palomino says that’s not necessary.
“This is typically handled by the title company,” she said, “but I always recommend consulting with a real estate attorney to get their professional advice and find out if representation is needed where you live or for your personal situation.”
4. List the home for sale
If you’re working with a real estate agent, they will help you prepare the home for sale, take photographs, market the property and coordinate showings with potential buyers. If you want to sell your home without the help of an agent, you will need to handle these tasks on your own.
5. Sell the home
Once your home is sold, the title company will send the required payoff amount to your reverse mortgage lender.
“You will want to ensure that the reverse mortgage loan is paid in full from the proceeds and that your account with the lender is closed,” Palomino said. Then you’ll receive any excess proceeds.
It is possible to sell a home with a reverse mortgage, but it’s not always easy.
If your home’s value has gone up and the balance on your reverse mortgage is low, selling the house, paying off your loan and pocketing the difference shouldn’t be too complicated. But if the value of your home has fallen below the amount you owe, you may need to consider other options. While the lender cannot go after you or your heirs for the difference between your loan balance and the sales price of your home, you may find it’s not worth the effort and expense to sell the property if selling doesn’t put any money in your wallet.