Selling a House With a Reverse Mortgage

In this article:

• Understanding a reverse mortgage
• Can you sell a house with a reverse mortgage?
• Why sell a home with a reverse mortgage?
• How to sell a house with a reverse mortgage
• Alternatives to selling a home with a reverse mortgage

Many retirees who want to age in place without selling opt for a reverse mortgage. This strategy allows homeowners to tap into their equity without having to move. But what happens if you decide to sell a home with a reverse mortgage? Whether you’re a homeowner with a reverse mortgage, you’re assisting a family member sell with a reverse mortgage, or you’ve inherited a home with a reverse mortgage, here’s what you need to know. 

Understanding a reverse mortgage

Most reverse mortgages are home equity conversion mortgages (HECM), which means they are controlled and insured by the Federal Housing Administration (FHA) and the Department of Housing and Urban Development (HUD). 

To qualify for an HECM reverse mortgage, you must:

• Be 62 years or older
• Live in the property as your primary residence 
• Own the home outright or have only a small mortgage balance 

While FHA and HUD oversight of reverse mortgages has decreased the number of predatory reverse mortgages out there, they do still exist. In this article, we’ll be focusing on FHA- and HUD-backed reverse mortgages, so if you have a privately managed reverse mortgage, this information may not apply. 

How a reverse mortgage works

A reverse mortgage allows you to convert your home's equity into a lien, which lets you receive monthly payments. Unlike a traditional mortgage, where the homeowner gains equity every time they make a payment, a reverse mortgage holder loses equity every month because they receive a payment. 

Can you sell a house with a reverse mortgage?

Yes, it's perfectly legal for a homeowner to sell a home with a reverse mortgage — it's your home, and you have the right to sell when you see fit. Just like with a traditional mortgage, you still hold the title, but the lender has a lien. When you sell, you pay the balance due to the lender at closing, then you walk away with any remaining equity. 

If you're selling a home with a reverse mortgage, make sure you have enough equity in the home to cover both your loan payoff balance and closing costs. 

How is selling a home with a reverse mortgage different than selling traditionally?

While the process is mostly the same, there are a few key differences when you sell a home with a reverse mortgage. 

Equity is going in reverse: With a traditional mortgage, you're gaining equity every month as you pay your principal. With a reverse mortgage, you're losing equity and increasing your debt each month as you’re paid. This minimizes the amount you'll net at resale. 

Non-recourse loan: Since reverse mortgages are backed by the federal government, they're usually known as non-recourse loans. This means that neither you nor your heir will owe more money than the home's value — essentially, you can't go underwater on a reverse mortgage home (this may not be true if you have a reverse mortgage that’s not FHA- or HUD-backed).

Due and payable letter: When you sell a reverse mortgage, you work with the lender to set a time frame to sell and agree on a fair sale price — more on this later. 

Why sell a home with a reverse mortgage?

The act of selling a home with a reverse mortgage is typically triggered by what lenders call a maturity event. Anytime a maturity event is reached, your reverse mortgage comes due. You can trigger a maturity event yourself (for example, deciding you want to sell your home). Or a maturity event might be reached automatically, due to the homeowner’s death or illness. 

Maturity events that require reverse mortgage payoff:

• Choosing to sell
• Death
• Illness that requires a move into assisted living or a nursing home
• Unpaid property taxes or HOA fees
• Home in disrepair

If you're being forced to sell due to a maturity event, stay in contact with your lender to prove you're actively trying to sell your home. If your lender thinks you’re not actively trying to sell after a maturity event, they may take action, like starting foreclosure proceedings. 

How to sell a house with a reverse mortgage

Selling a house with a reverse mortgage is similar to selling a home with a traditional mortgage. 

1. Contact your reverse mortgage lender

As with any home sale, your first step is to contact your lender to get a loan payoff amount. This estimate will tell you how much you'll owe to your reverse mortgage lender at the closing table, plus any fees. Your loan payoff includes the principal borrowed, any interest owed and any unpaid additional charges, prorated to your closing date. 

Follow these steps:

• Notify the lender within 30 days of a maturity event. The lender will verify your maturity event. 
• The lender then sends a due and payable letter to the homeowner or heir.
• Respond to the lender within 30 days of receiving the letter that you plan to sell the home.
• Expect an appraiser, hired by the lender, to appraise the property. 
• You will owe the total debt of the reverse mortgage upon selling or 95% of the appraised value if the debt exceeds the value. The extra 5% is covered by insurance.

2. Set a listing price

First and foremost, your listing price should be based on the amount you owe on your reverse mortgage balance, as given in your due and payable letter. Don't forget to factor in closing costs. If you are also selling to turn a profit, consider current market conditions and recent nearby sales of comparable homes. 

Pricing with an agent: You can hire a real estate agent to run the comps and help set pricing. An agent will also handle showings, help you negotiate with your buyer and work to ensure a smooth closing process. Let your agent know as soon as possible that you have a reverse mortgage so they can help you through the process. 

3. Hire a real estate attorney

In almost half of all states, you are required to hire a real estate attorney. Even if it's not required in your state, it can be a good idea to have legal representation when dealing with a reverse mortgage, because most people are less familiar with the process. And if you’re handling a reverse mortgage sale on an inherited home, it can be helpful to have an attorney walk you through the process. 

The 22 states where you are required to use a real estate attorney to sell your home are Alabama, Connecticut, Delaware, the District of Columbia, Florida, Georgia, Kansas, Kentucky, Maine, Maryland, Massachusetts, Mississippi, New Hampshire, New Jersey, New York, North Dakota, Pennsylvania, Rhode Island, South Carolina, Vermont, Virginia and West Virginia.

4. List and sell

Whether you're selling on your own or with an agent, listing a home with a reverse mortgage for sale is just the same as listing a home without one. Strong listing descriptions, professional photos, and prepping for open houses and showings are all must-do activities to help you find a buyer. 

5. Close and transfer funds

At closing, the title company will send the loan payoff amount directly to your reverse mortgage lender. Double-check your closing statement to ensure everything is paid in full. The excess proceeds (minus closing costs) should be transferred to you. 

Alternatives to selling a home with a reverse mortgage

If you've crunched the numbers and determined that your home's current market value isn't high enough to pay off your reverse mortgage, cover closing costs and turn a profit, here are some alternatives. 

Aging in place

Unless you're going to make money from selling a home with a reverse mortgage, it's best to stay put. Of course, this doesn't apply to people who need to move for an important reason, like mobility restrictions, medical needs or the desire to be closer to family. 

Paying off the balance

Heirs or the homeowners themselves can pay off the balance due to keep the home after a maturity event. It usually requires some kind of alternative financing, as well as notice to the reverse mortgage lender. 

If you're inheriting the home, you'll still need to respond to the lender within 30 days of receiving the due and payable letter. You can usually set up a payment plan. Heirs are typically allowed six months to repay the debt. 

Deed in lieu of foreclosure

If you aren’t able to sell the home after a maturity event and you don’t want to risk foreclosure, you can often deed the home back to the lender and walk away — without the house but without a foreclosure on your credit report. Heirs sometimes take this path if they feel the amount of money they’ll get out of the house isn’t worth the hassle of going through the listing process.