It can be hard to fully understand exactly how a reverse mortgage works, as well as how selling a home that has one is different from the more normal selling process. In reality, the process is similar in nature; however, the big difference involves how the lender manages the actual amount of the loan in the event that it exceeds the actual price of the home itself. If you find that you’re working with a client who has a reverse mortgage, consider the following four questions that will help you to better understand how the process works.
What Exactly is a Reverse Mortgage?
This is similar to a regular mortgage; however, there is a difference involving the way the money is paid out. A reverse mortgage involves the client leveraging the amount of home equity that they’ve built up until the loan is paid out in one lump sum, a set monthly payment, or a line of credit. This money can be used for all sorts of purposes, such as a client’s medical expenses, monthly income subsidizing, or home improvements. In terms of the amount that the client can receive, this depends on factors such as age and the current amount of equity that they have in their home. The interest on the principal will continue to grow as the reverse mortgage is paid out to the client.
How is This Paid Back?
This type of mortgage may not actually have a set maturity date, as opposed to a more traditional mortgage. Furthermore, the date of the loan may also have to be repaid in full. Here are some of the standards that may be established in terms of the definition of maturity for a reverse mortgage:
*The borrower passes away
*The property is sold by the borrower
*The borrower decides to move out of the home
*The borrower does not pay property taxes or does not provide proper upkeep on the home
If the client sells the home, the lender will automatically have the right to recoup any outstanding balance on the reverse mortgage. The only exception is if there is a lien in regards to unpaid property taxes. If the outstanding amount is less than the sale price, the difference will go to either the client or their next-of-kin.
Are There Limits Involved with Selling a Home that Has a Reverse Mortgage?
In terms of a maturity date for a reverse mortgage, this is most often whenever a borrower decides that they want to sell their home. When it comes to a more traditional mortgage, a client’s home value is always expected to exceed the remaining balance of a mortgage at resale; however, since a reverse mortgage borrower generally is paid in installments, the principal of the mortgage will increase instead of decrease. This means that it’s possible for the loan to exceed the overall resale value of a borrower’s home. Whenever you work with someone who has a reverse mortgage, always focus on factors that will have the most impact on their home, including property condition, renovations, and maintenance.
What Happens if the Home has Lost Value?
If a client has a home that has lost property value to the point where its fallen below the amount that they originally borrowed on a reverse mortgage, a short sale may have to be conducted. Thankfully, a reverse mortgage is also referred to as a nonrecourse loan, which means that a lender will not legally be able to go after your client in court, nor can they go after any of their heirs for any of the difference between the outstanding loan amount and the final overall sale price of the home itself. Short sales, however, require that a lender must buy in before a home is able to be listed for a lower value, which means that a lender may require an appraisal for the value to be officially confirmed before they agree to a listing being made.
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