Since there are still about 19 million homeowners nationwide that may be underwater on their mortgages, there are some folks that are asking, “Can I do a short sale if I have a reverse mortgage?” Before jumping to the answer, it is important for short sale listing agents to ascertain whether there is any point to a seller participating in a short sale if he or she has a reverse mortgage. So, let’s take a closer look at reverse mortgages.
What Is a Reverse Mortgage?
A reverse mortgage is designed to help seniors access the equity in their home 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:
- the borrower dies
- the borrower fails to stay current on taxes or insurance
- the borrower moves out of the house for 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).
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), often times 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.