Is it true that if an inheritor or owner of a reverse mortgage decides to sell the home and asks for less than the loan amount, the reverse mortgage company holding the note cannot request more than the amount the seller asked for?
You have asked a question that covers distinctly different scenarios, and the answer to each scenario differs based on the circumstances. If a borrower passes and the home goes to heirs, the lender will also order an appraisal.
If the property is worth less than what is owed on the mortgage, the lender will work with the borrower’s heirs to allow the home to be sold at less than the loan balance. This would be known as a short sale, and any such sale would require lender/HUD approval after they received and approved the contract for sale and had appraised the property.
HUD will also allow the heirs to repay the obligation at 95% of the current market value or the amount owed, whichever is less, upon the death of the reverse mortgage borrower. This option is written into the mortgage loan documents and requires the lender or HUD to obtain an appraisal of the home.
Reverse mortgages are non-recourse
The reverse mortgage is a non-recourse loan, and the lender cannot look to other assets to repay the obligation. However, when you say that they can “never request more than the seller asked,” that would not be true and is a bit misleading, especially if the homeowner has not passed.
The seller could not ask for a sales price well below the current market value and expect to sell to a family member or friend at half the current market value and think they could complete the sale at that amount. The lender would be forced to accept it.
Also, suppose the seller is the original borrower and has yet to pass. In that case, there is no right to repay the loan at 95% of the current market value rather than the amount owed. If such a provision existed, family members could step in and sell/buy homes every time the market fell downward, ensuring a loss to HUD.
Bona fide third-party sale
In the event of a sale by the current owner or by heirs to a third party, the lender would obtain an appraisal on the home, and any payoff amount less than the full mortgage balance would be dependent on that current appraised value, or they could still exercise their right to foreclose on the mortgage.
The lender and HUD are not under any obligation to accept less than the amount owed on the loan under a sale to a third party.
In most cases, if the owner has passed and the sale is for the actual market value, the short sale would most likely be approved because if that was the value at which HUD or the lender believed, they too would be forced to sell the home, there is no reason to go to the added expense and time to foreclose and market the property.
However, suppose the seller had yet to pass, and there was any question about the legitimacy of the sale. In that case, the approval for repayment at less than the full amount owed may not be granted.
However, they still could not obtain a deficiency judgment against the original owner or their estate for any amount they did not receive to repay the loan from the sale. That is the non-recourse nature of the loan.
Selling Upside Down
The second circumstance is if the original borrower decided to sell the home. However, the value was now well below the outstanding balance, and the borrower would still be responsible for the outstanding loan balance (just as any borrower would be on any home they sold).
There is no option for a borrower to decide they wanted to move with the expectation that HUD would incur all loss because of their desire to move before they passed or could sell the home for the amount owed.
However, even if the borrower did leave home when it created a loss on the reverse mortgage, there can be no deficiency judgment if the borrower decided to move or had to move but could not pay the mortgage balance.
In other words, the loan would default, and the borrower would go through foreclosure. Still, no deficiency judgment would force the borrower to pay any amount the lender could not recoup through a foreclosure sale.
This would not be a healthy alternative for most borrowers as they would have to pay to live elsewhere. Their credit would be adversely affected (as well as they would not be eligible for any other FHA-insured loans until any losses had been repaid).
This may not even be a consideration for borrowers moving permanently into assisted living or nursing homes. This may be a wrong choice with lasting repercussions for borrowers desiring to purchase again who are still active and rely on good credit.
There also may be other tax implications to the borrower or the estate if they took equity from the home and left with a balance owing on the loan. Borrowers should always consult with a tax professional before making arbitrary decisions.
ARLO recommends these helpful resources:
- Purchase Reverse Mortgages: Rates, Down Payment & Limits