Laurie MacNaughton and Neil Sweren © 2014
Realtors, home owners, and family members frequently have questions regarding how the “back-end” of a reverse mortgage (or HECM) works. The answer to the question depends upon whether the property with the reverse mortgage is underwater at the time the last person on title permanently vacates the home.
Selling the home if the house is NOT underwater
If the loan balance is less than the current property value, the sale is handled like any other home sale. There is nothing unusual about paying off a reverse mortgage with one exception: there are certain time constraints the lender MUST follow once the last person on title no longer occupies the home as his/her primary residence.
If the property is not underwater the reverse lender provides a written payoff statement. At closing, the loan balance is paid off – just as would be the case with any other mortgage. After the loan is paid off, any and all remaining equity goes to the seller, which typically is the borrower’s heirs or estate.
Selling the home if the property IS underwater
If the loan balance exceeds the property value the process is a little different.
HECM payoffs are not negotiated like other short sales or short payoffs. The lender must accept as satisfaction of the lien the first offer that is at least 95% of the home’s current appraised value.
HECM loans are non-recourse in nature, so the borrower and his/her estate CANNOT be held responsible for any shortfall. This is true even if the borrower has millions in other assets. The house repays what it can, and any shortfall is covered by the FHA insurance fund.
It is important to understand this is not a short sale, and that there is no negotiation required or permitted. The lender is prohibited by HUD from accepting less than 95% of the home’s appraised value.
What if the heirs want to keep the home?
The lender does not care how the reverse mortgage is paid off, only that it is paid off. If the family desires to keep the property, the loan can be satisfied by refinancing or by paying off what’s due.
In an underwater situation, the 95% figure noted above holds true for family members who want to purchase the home: heirs can buy the home for 95% of the appraised property value – which is not the full loan amount.
Important note on time frames
It is important to note there are mandated time constraints placed upon the lender, and the clock starts ticking the day the last surviving borrower no longer occupies the property. Once the home is unoccupied, the borrower or his/her estate have six months to pay off the loan. In addition to the initial six months, up to two three-month extensions can be requested (for a total of one year) if more time is needed.
Extensions are not automatic; documentation that the home is listed for sale, a sale is pending, or that a family member is applying for financing on the home will be required in order for an extension to be granted.
Communication is key
The loan servicer should be contacted immediately once the home is vacant. Reverse mortgage servicers deal with “back-end” situations every day and help borrowers and family members through the process. However, they can’t help if they don’t hear from anyone. All reverse mortgage servicers send monthly loan statements to borrowers. Those statements contain all loan and contact information necessary to make contact with the lender.
If you have questions regarding an FHA-insured reverse mortgage, give me a call. I always love hearing from you.
Laurie MacNaughton  is a freelance writer and Reverse Mortgage Consultant with Southern Trust Mortgage.
She can be reached at 703-477-1183 Direct or Laurie@MiddleburgReverse.com