Can You Sell a House With a Reverse Mortgage?

text sign showing hand written words reverse mortgage

Reverse mortgages are a great way to meet living expenses post-retirement while staying in your home. There are no expectations for you to pay back the lender monthly because the lender knows you don’t have a consistent income.

Funds are advanced to you on the strength of the equity of your house and primary residence, and the payment only falls due when you are deceased or if you move from the property that is securing the reverse mortgage, unlike a traditional mortgage where you have to make a monthly payment.

While the initial plan is usually to live out your retirement in your home, situations occasionally come up that might force you to opt-out of this sweet deal. You start asking yourself whether it’s possible to sell the house while the reverse mortgage is still running.

Luckily, you can sell a home with a reverse mortgage anytime you want because the reverse mortgage lender is equally ready to be paid. You just need to make provisions for clearing the mortgage balance. You can also sell to a cash buyer.

The sale should not subject you to any penalties as it is not prohibited, but you will have to cover any accrued interest or fees.

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Circumstances That Might Force You to Sell a House With a Reverse Mortgage

Most sellers of properties with reverse mortgages do it because it is the only viable option. There are situations referred to as ‘maturity events’ which trigger reverse mortgages to come due.

Death of the Homeowner and Eligible Non-Borrowing Spouse (If Applicable)

The loan becomes due and payable, and the heir(s) are required to either pay off the loan balance, buy the house, sell it, or turn it over to the mortgage lender (who will also probably sell it) to satisfy the reverse mortgage debt.

The U.S Government’s Consumer Financial Protection Bureau (CFPB) elaborates that the heir(s) will not have to pay more than the full loan balance or 95% of the house’s appraised value, whichever is less.

These rules apply to the Federal Housing Administration (FHA) backed Home Equity Conversion Mortgage (HECM), the most common reverse mortgage loan in the U.S. There are other proprietary reverse mortgages offered by private lenders that have their own unique rules.

When the Homeowner Needs to Move to an Assisted Living Facility

Reverse mortgages are only offered to people 66 years old and over. Some of the members of this demographic get to the point where they can’t stay alone and will require assistance.

You might need to move to a nursing home for full-time care, move in with your children, or be closer to people who can care for you. The reverse mortgage becomes due the moment you move out as there is nobody to maintain the property.

When the House Falls Into Disrepair

This reduces the house’s market value, and the loan servicer will not be able to recoup the full amount of the reverse mortgage extended to the senior homeowner.

The homeowner can use part of the proceeds from the reverse mortgage to maintain the house, but occasionally the repairs are too costly for them. It is better to sell the house than watch as the value depreciates.

Falling Behind on Property Taxes, Insurance Payments or Homeowners Association (HOA) Fees

The lender requires the homeowner to stay current with taxes and insurance to secure their collateral which is the house. The tax authority might take hold of the house if the taxes are not up to date and insurance works as a backup in case of accidents like fires.

If you are servicing a reverse mortgage and cannot keep up to date with these bills, the lender might want to foreclose. The most practical way to foreclose is to sell the house.

reverse mortgage concept

Why You Should Sell the House Instead of Waiting for the Lender to Foreclose

While the reverse mortgage servicer will only be interested in recouping what they gave out as loan proceeds, you will be looking to maximize the property’s value.

They might sell below the market price, but you will take full advantage of the housing demand. It provides an opportunity to profit from the sale or at least break even.

If the house is in the middle of a seller’s market like Denver, Colorado, you might even find legitimate cash buyers willing to take it off your hands as is, saving you the agent and repair fees. This requires a bit of planning and anticipation to be well executed.

What Happens When You Sell a House With a Reverse Mortgage?

Once the house is sold, the sale proceeds are applied towards paying off your reverse mortgage.

The total amount to be paid off includes the outstanding loan, its accrued interest, and any other administrative fees determined by the lender. They should provide a clear breakdown of how they arrived at the figure.

The lender should then close your reverse mortgage account and pay you with any excess after their dues have been settled.

Your payback would be higher if the amount of your reverse mortgage were lower than the value of the house or the house’s market value appreciated throughout the loan. If you had maxed out the value and property values declined, on the other hand, sale proceeds might not even be sufficient to cover the outstanding loan.

The transaction becomes much more complicated in such a situation. You need to ensure that your selling price at least matches the house’s appraised value so that mortgage insurance can pay for the difference.

If you are selling a deceased person’s home as the heir(s) or estate administrator(s) so you can pay off their reverse mortgage, you are not required to pay back more than the house is worth, even if they owed more than that.

home deal final agreement

How to Sell a House With a Reverse Mortgage

Get a Full Payoff Quote from the Lender

Finding out the total amount owed will give you an estimate of the asking price that will cover the reverse mortgage, its associated costs, and any profit you might want on top. Ask for the quote in writing to avoid a lot of back and forth after the sale is done.

The quote should include the loan balance, interest and other outstanding fees. It should also make sense per your agreement with the lender.

Take this opportunity to inform them of your intention to sell so they can also give directions if there is any protocol to be followed.

Engage a Real Estate Agent, Realtor or Attorney

This step is optional; you can skip it if you feel you have sufficient market intelligence or the demand is so high you can get a great deal without trying too hard. These professionals are constantly in the field and have an updated market feel.

They will give you a fair estimate of the prevailing market price of your home so you can tell if it will be sufficient to pay off the reverse mortgage balance. You can opt to hire them to handle the whole transaction as it can get murky further down the line and they are well versed in the technical elements of the transaction.

List the House for Sale

Keep the lender’s payoff quote in mind when considering the listing price, as you want to cover it in full if possible.

You can list it on your own in what is known as for sale by owner (FSBO) and deal with the buyers directly, avoiding agents’ commissions and closing fees to keep expenses low.

Alternatively, you can let the real estate agent or attorney handle the transaction because they are better bargainers and have a higher capacity to reach buyers. They might get you a better offer than what you could get on your own.

Sell the House and Settle the Reverse Mortgage

Let the proceeds from the sale be channeled to the lender’s account directly so they can deduct what is owed to them. Confirm that they have cleared the loan and closed the account to ensure it doesn’t accrue any further charges. You will receive any excess money once the account is closed.

The Bottom Line

A reverse mortgage is a facility designed to help out post-retirement and shouldn’t be the reason why you are tied to a house when the situation requires that you move.

You are legally allowed to sell a house with a reverse mortgage; the fact that you get to keep the title even as the loan is still running means you are free to sell it whenever you need to.

You should be prepared to clear the reverse mortgage as soon as you sell the house, as it will fall due automatically. It is therefore advisable to ensure the loan amount stays below the house’s value to fully cover it.

Don’t wait until you have almost used up the house’s equity to consider selling. As to whether you will get anything out of the transaction, this depends on your unique circumstances.

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