By Greg Geilman
Photo credit: Morguefile.com/jonathan11
It’s difficult to understand how a reverse mortgage works and how selling a home with one differs from the standard procedure. The truth is that it’s very similar; the major difference is the way the lender manages the loan amount if it exceeds the home price. If you’re working with a client who has a reverse mortgage, here are four questions to help you better understand the process.
What Is a Reverse Mortgage?
It’s much like a regular mortgage, but the way in which the money is paid out is a little different. With a reverse mortgage, your client is leveraging the home equity they’ve built up, and the loan is paid out in a lump sum, line of credit, or set monthly payment.
Your client can use this money to pay medical expenses, finance home improvements, or even subsidize their monthly income. The amount your client can get from a reverse mortgage depends largely on their age and the equity they have in their home. As the bank pays out the reverse mortgage to your client, the interest on that principal grows.
How Is a Reverse Mortgage Paid Back?
Unlike a traditional mortgage, a reverse mortgage may not have a set maturity date, or the date the loan must be repaid in full. The standards are set in the loan and may define maturity as the date that:
- The borrower dies.
- The borrower sells the property.
- The borrower moves out of the home.
- The borrower fails to provide reasonable upkeep or pay property taxes.
Once your client sells their home, the lender has first right to the proceeds to recoup any outstanding balance on the reverse mortgage (unless there is also a lien on the home for unpaid property taxes). If the outstanding loan amount is less than the sale price, your client or their next-of-kin will receive the difference.
Are There Limits on Selling a Home With a Reverse Mortgage?
The maturity date of a reverse mortgage is most often when the borrower sells their home. So the sale of the home is the most common part of the reverse mortgage process. With a traditional mortgage, you expect your client’s home value to exceed the remaining balance of their mortgage at resale. But because the borrower of a reverse mortgage is typically being paid in installments, the mortgage principal increases rather than decreases. That makes it quite possible that the loan amount could eventually exceed the resale value of the borrower’s home. Therefore, when working with a seller who has a reverse mortgage, you should focus on factors that can impact their home value the most, such as renovations, property condition and maintenance, and the status of property taxes.
What If the Home Has Lost Value?
For a client whose property value has fallen below the amount they borrowed on a reverse mortgage, you may need to conduct a short sale. Fortunately, reverse mortgages are known as “nonrecourse loans,” which means the lender cannot go after your client or their heirs for the difference between the outstanding loan amount and the final sale price of the home. But short sales require the lender’s buy-in before you can list the home at a lower value. So the lender may require an appraisal to confirm the value before agreeing to the listing.
Greg Geilman, e-PRO, is managing partner of the Freedman Geilman Group at RE/MAX Estate Properties in Manhattan Beach, Calif.