Can You Do A Short Sale On A Reverse Mortgage?

Yes – You can complete a short sale on a Reverse Mortgage. Reverse mortgages are insured by the FHA, which means the approval process for a reverse mortgage is similar. The lender will want to see evidence of financial hardship (loss of benefits, death in the family, etc.) in order to approve the short sale on your reverse loan.

What Is a Reverse Mortgage?

A reverse mortgage is designed to help seniors access the equity in their homes and so that they have more available cash. The reverse mortgage is a product that is only available to homeowners who are over 62 years old; it is essentially a loan taken against the equity a borrower has in his or her home. The loan amount can be paid to the homeowners as a lump sum, or borrowers can access the cash as a line of credit.

The amount of the total loan is recorded as a lien for that amount against the property, even if the total amount of that loan has not been disbursed. For example, a reverse mortgage for $100,000 may be disbursed as a $50,000 lump sum, with the remaining $50,000 available as a line of credit. The $100,000 would be the recorded lien.

In a reverse mortgage, the borrower is under no obligation to make any payments: the loan balance grows with time. Remember that the aim of a reverse mortgage is to free cash up for seniors who intend to stay in their home for as long as they are able to care for themselves.

A reverse mortgage loan comes due only upon one of the following:

  • Death of the borrower
  • The borrower fails to stay current on taxes or insurance
  • The home is not owner-occupied for a period of more than 12 months

When a reverse mortgage comes due, the borrower (or heirs to the estate) may refinance the home and keep it, sell the home and cash out any equity, or turn the home over to the lender. (Note, however, that the first two options are not available if the home is underwater, because there is no equity).

What is a Short Sale?

A short sale is a real estate sale in which the lender who owns the mortgage agrees to let the borrower sell the home for less than what he or she owes on the loan. While most lenders are reluctant to agree to short sales because it will mean they have to take a loss, there are some instances where a lender will allow it. Usually, lenders are more likely to agree to a short sale when they think it will keep them from experiencing a greater loss. For example, if a homeowner with a reverse mortgage of $200,000 can only sell the home for its current market value of $100,000, the lender may decide to approve a short sale agreement because they figure $100,000 is better than nothing. Short sales are also less costly than foreclosures, so if a reverse mortgage borrower is at high risk for foreclosure, a short sale may be the most beneficial option for everyone involved.

Reverse Mortgage Short Sales

So what happens when property prices fall, and a reverse mortgage ends up underwater?

If the borrower is living in the home and wants to continue living in the home: If the borrower is living in the home, there is good news. All reverse mortgages are non-recourse loans, so a borrower cannot end up owing your lender any more than what you borrowed.

If the borrower is living in the home but wants to sell it: If the home is underwater, the only way to sell it is by getting the lender’s permission for a short sale. However, one advantage to a short sale on a reverse mortgage, compared to on a conventional mortgage, is that the lender usually will not require it to be an arm’s length transaction. This requirement is dropped for reverse mortgages because it is common that someone within the family may want to purchase the family home from the borrowers.

If the borrower has passed away: If the home has passed on to heirs, but there is no equity in the home then there is no value being passed on to the heirs. Additionally, the heirs are not responsible for the negative equity: that is entirely the bank’s problem. While the heirs could, theoretically, work with the lender to negotiate a short sale, there is no reason for them to do that: they are not going to get the property in the end, and they are not going to see any cash from it. However, since an heir or relative is permitted to purchase the property (and there is no arm’s length transaction requirement), oftentimes heirs or trustees of a decedent purchase properties in a reverse mortgage short sale. In fact, many heirs are able to purchase these properties for existing market value and flip them or keep the property as an investment.

If you are contacted about a reverse mortgage short sale, know that these transactions are not so uncommon. Keep in mind that you may be able to bring the buyer to the transaction as well, since (unlike the traditional short sale) the buyer in a reverse mortgage short sale can be a relative of the borrower.

Contact us today to discuss your situation and the options that are available to you.