Four Things You should Know about a Reverse Mortgage

It can be a challenge understanding how a 

reverse mortgage actually works and how selling a home with a reverse mortgage differs from the standard procedure. In actually, it is very similar; the major difference is the way the lender manages the loan amount, if it exceeds the price of the home.

What is a Reverse Mortgage?

A reverse mortgage is a financial agreement in which a homeowner relinquishes equity in their home, in exchange for regular payments. Traditional mortgages decline, as you pay down the loan; a reverse mortgage rise over time, as interest on the loan accrues.

How is a Reverse Mortgage Paid Back?

A traditional mortgage has a set maturity date by which the loan has to be paid back; however, with a reverse mortgage, the standards are set in the loan and may define the due date as:

•        The borrower dies

•        The borrower sells the property

•        The borrower moves out the home

•        The borrower fails to provide the upkeep or pay property taxes

If the buyer sells their home, the lender takes precedence and has the right to recoup any outstanding balance on the reverse mortgage (unless there is a lien on the home for unpaid property taxes).

Are there Limits on Selling a Home With a Reverse Mortgage?

Typically, the maturity date of a reverse mortgage is when the borrower sells their home; thus, the sale of the home is the most common part of the reverse mortgage process.  

With a traditional mortgage, the home value is expected to exceed the remaining balance of the mortgage, at resale.  However, with a reverse mortgage, the borrower is typically being paid in installments, the mortgage principal increases—rather than decreases.  This makes it possible, or likely, that the loan amount could exceed the resale value of the home.

            Note: If you ever decide to get a reverse mortgage, be sure to renovate, when necessary, maintain the keep-up of your property conditions and stay current, with your taxes.

What if the Homes Has Lost Value?

If your property has lost value, you may want to consider a short sale.  Fortunately, reverse mortgages are known as “nonrecourse loans,” which means the lender cannot go after the borrower or your heirs for the difference between the outstanding loan amount and the final sale of the home.

            Note: Short sales require the lender to “buy-in” before you can list your home at a lower value.  The lender may require an appraisal to confirm the value before agreeing to the listing.