Short sale on a Reverse Mortgage?

Question

Is a short sale directly with a lender required on a property with a reverse mortgage? HUD website says that the heirs of the property with a reverse mortgage can sell at fair market value even with negative equity and FHA covers the loss to the lender. Can the heirs sell below market value with out dealing directly with the lender?

Scott Hubbard · Answer

Although there might be exceptions, reverse mortgages are for owner occupied only as they will need to be FNMA compliant. Reverse mortgages are highly regulated and if there are a subset of reverse mortgages that are available for non-occ, then I would be interested in learning more about the lender.

Mark Ferguson · Answer

This thread is from 6 years ago.

Catherine Coy · Answer

Moderators, I think you should seriously consider disallowing any discussion about reverse mortgages on this forum.  This thread is the sixth thread I've read today on the subject of reverse mortgages.  Every one of them is simply full of misinformation about HECMs [home equity conversion mortgage].

FHA's HECM program was revamped in April 2015, so very little of what can be found on Bigger Pockets threads prior to that date about this loan is relevant today.

Here's a good resource got reverse mortgage information.

http://www.hecmworld.com/reverse-mortgage-news/heirs-dead-wrong-estate-planning-deduction

Rob Huxman · Answer

It is just like any other Short Sale. If the lender is owed more then what the property is worth you can still do a short sale. The point where the insurance company will pay off thge mortgage should kick into effect though. 9 times out of 10 the lender require the borrower to have life insurance on the borrower to cover the price of the mortgage. That being said it does not always happen like that. So yes you can Short Sale with the lender they will still do a BPO and go to Negotiations on the property. If the property is paid off by insurance the owners next of kin still owes the lender the price of the loan. That is where the lenders are smart by making the reverse mortgage. they get paid twice in most situations. I know it sounds really crooked. All I got to say is welcome to Lending in America!

Chris T. · Answer

Aaron, if the deceased owner had a life insurance policy then it could be used towards paying off the reverse mortgage, in  which case, the heirs could sell it to you for whatever they want.

I know that's off topic a bit but I've heard of landlords retiring by taking out a reverse mortgage on all of their properties and the heirs wouldn't be responsible for paying it off because of the life insurance policy.

Jon Holdman · Answer

I doubt the lender has any justification for forcing the heirs to refinance or start making payments if this really was a reverse mortgage.  The heirs can simply sell, and if there's any equity, keep it.   If not, they're not on the hook.  The lender no doubt has a procedure for doing this.  The heirs should contact the lender to find out their procedure.  I'm 100% confident a purchase and sale agreement between you and the heirs will be required, but that that will not be all that's required to complete the transaction.

Bill Gulley · Answer

Hi, I like to think of a reverse mortgage as a single pay or installment payment reverse annuity. Since the lump sum goes from the "lender" to the annuitant,(borrower) collateral is taken to ensure repayment up to the amounts accrued and owing as dispersed. Just as an insurance annuity, values are based on mortality tables and the equity to be collateralized. The company guarantees to disperse a minimum amount, upon death only the amounts accrued are returned to release the collateral, if not redeemed by the estate, the remaing amount may be paid and the property retaind by the company. Working out the annuity on it's present value represents a discounted amount of the beginning equity. That's how I look at it. So, I don't see a short sale here, I see it as an estate liquidation/reo. Bill.

Aaron Schwartz · Answer

Yea its definitly a loan.. proceeds from the sale of the property pay it back..

and yes Jon the lender does require an appraisal on the property when they sell. If the due amount of the reverse mortgage is above the fair market value the heirs or anyone for that matter does not owe or will never owe more than the fair market value due to the insurance tha is paid when you have a reverse mortgage.

Just not sure what happens when the heirs are unable to sell at fair market value and lack the time or the money to keep up with the property and on top of that they live 300miles away. I have yet to come across any information about this situation.

Jon Holdman · Answer

Not an expert on reverse mortgages, but I believe a reverse mortgage IS a loan.  It just has different repayment terms.  Its essentially a pay option ARM where the minimum payment is zero and there is no maximum on how high the outstanding balance can go.  The loan proceeds are given to the borrower either all at once or in monthly payments.

As far as the OP's question, the question would only apply if the reverse mortgage was a HUD loan.  I assume that's the case, but not all reverse mortgages are.  And, can the heirs sell the property to you for $1 and tell HUD, sorry, that's all we got, here's your dollar?  I seriously doubt it.  I'm sure there's some provision that allows HUD to request BPOs or appraisals on the property to establish a value.  Ask the heirs for copies of the paperwork from the reverse mortgage or get an authorization to release information and contact HUD directly to see what you need to do to establish a value.

Aaron Schwartz · Answer

This is off reversemortgageguide.org.

A reverse mortgage is a low-interest loan for senior homeowners that uses a home's equity as collateral. The loan amount is a percentage of the home's value determined by the age of the youngest homeowner. The loan does not have to be repaid until the last surviving homeowner permanently moves out of the property or passes away. At that time, the estate has approximately 12 months to repay the balance of the reverse mortgage or sell the home to pay off the balance. All remaining equity is inherited by the estate. The estate is not liable if the home sells for less than the balance of the reverse mortgage.

In the event of death or in the event that the home ceases to be the primary residence, the homeowner's estate can choose to convert the reverse mortgage into a traditional mortgage to keep the house or else sell the home to pay the balance (the cash borrowed, interest, and fees).

If the equity in the home is worth more than the balance of the loan, the remaining equity belongs to the heirs. No other assets are affected by a reverse mortgage. For example, investments, second homes, cars, and other valuable possessions cannot be taken from the estate to pay off the reverse mortgage.

If the sale of the home is not enough to pay off the reverse mortgage, the lender must take a loss and request reimbursement from the FHA.

Short sale on a Reverse Mortgage?

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