How to Sell a House With a Reverse Mortgage

Selling a home with a reverse mortgage is a common process many homeowners successfully navigate. A reverse mortgage allows qualifying homeowners (typically aged 62+) to convert home equity into cash without monthly payments. This arrangement offers flexibility, but the loan balance grows over time. When selling, understanding the steps to settle the reverse mortgage ensures a smooth transaction.

Understanding Reverse Mortgage Payoff

A reverse mortgage loan becomes due and payable when the home is sold, the borrower moves out, or passes away. Unlike a traditional mortgage, a reverse mortgage accrues interest and fees, adding to the loan balance over time. The total loan balance includes principal advances, accrued interest, mortgage insurance premiums (MIP), and servicing fees. Interest is calculated daily and added to the balance monthly, leading to a compounding effect.

Mortgage Insurance Premiums (MIP) are standard for most reverse mortgages, particularly FHA-backed Home Equity Conversion Mortgages (HECMs). There are two types of MIP: an initial premium, often 2% of the home’s appraised value or the FHA maximum lending limit, and an annual premium of 0.5% of the outstanding loan balance. These premiums, along with servicing fees (which can be up to $35 per month for adjustable-rate loans or $30 for fixed-rate loans), are added to the loan balance and accumulate until the loan is repaid.

Reverse mortgages are non-recourse. This means the borrower or their estate will not owe more than the home’s appraised value or sale price, whichever is less, even if the loan balance exceeds the home’s value. The FHA’s mortgage insurance covers any shortfall between the loan balance and the sale proceeds, protecting the borrower and their heirs from personal liability. The loan is repaid directly from home sale proceeds, settling the outstanding debt.

Preparing Your Home for Sale

Before listing a home with a reverse mortgage, obtaining a payoff statement is a necessary first step. This document provides the exact amount required to satisfy the loan on a specific date, including all principal, accrued interest, mortgage insurance premiums, and servicing fees. Homeowners or an authorized representative can request this statement directly from their reverse mortgage lender or servicer. The request typically requires the FHA case number, the property address, the borrower’s name, and the anticipated payoff date. Lenders usually provide the payoff statement within one to seven business days.

Consulting with professionals experienced in reverse mortgage sales can streamline the process. A real estate agent familiar with reverse mortgage sales offers guidance on pricing and marketing. A financial advisor or real estate attorney can provide insights into the sale’s financial and legal implications. These professionals can help anticipate potential issues and strategize to maximize the sale outcome.

Preparing the property is important to attract buyers and achieve the best sale price. This includes addressing any necessary repairs, decluttering, and staging the home to enhance its appeal. While these steps are common to any home sale, they become particularly relevant when aiming to maximize sale proceeds to cover the reverse mortgage balance. Gathering important documents such as the property deed, previous closing documents, and recent property tax records will also facilitate a smoother transaction.

Executing the Sale and Loan Settlement

Once the home is prepared and listed, the process of receiving offers and negotiating a sale begins. The goal is to secure an offer that allows for the full repayment of the reverse mortgage and, ideally, provides remaining equity to the homeowner or their estate. A real estate agent plays a central role in marketing the property, coordinating showings, and managing negotiations with potential buyers.

The closing process is where the reverse mortgage loan is officially settled. A closing agent, typically from an escrow company or title company, facilitates this stage. This neutral third party prepares and reviews transaction documents, holds funds in escrow, and ensures all sale conditions are met. The closing agent coordinates with the reverse mortgage servicer to obtain the final payoff and ensure the loan is satisfied from sale proceeds.

At closing, the sale proceeds are first used to pay off the reverse mortgage lender. This payment covers the entire outstanding balance, including principal, accrued interest, and any associated fees and mortgage insurance premiums. If the sale price exceeds the total loan balance, any remaining equity after covering selling costs (such as real estate commissions and closing fees) is distributed to the homeowner or their estate. Conversely, if the sale price is less than the loan balance, the non-recourse feature of the reverse mortgage protects the borrower or their estate from owing any additional amount beyond the sale proceeds. The mortgage insurance fund typically covers any deficit, ensuring that the homeowner or their heirs are not personally liable for the difference.