Selling a Home With a Reverse Mortgage

Learn more about reverse mortgages and what you need to consider if you are selling a home with a reverse mortgage.

What is a Reverse Mortgage?
A Reverse Mortgage is similar to a regular mortgage, but the way in which the money is paid out is a little different. With a reverse mortgage, the homeowner is leveraging the home equity they’ve built up, and the loan is paid out in a lump sum, line of credit, or set monthly payment.
The homeowner typically uses this money to pay medical expenses, finance home improvements, or even subsidize their monthly income. The amount an individual can get from a reverse mortgage depends largely on their age and the equity they have in their home. As the bank pays out the reverse mortgage to the homeowner, the interest on that principal grows.
How Is a Reverse Mortgage Repaid?
Unlike a traditional mortgage, a reverse mortgage may not have a set maturity date or the date the loan must be repaid in full. The standards are set in the loan and may define maturity as the date that:

• The borrower dies.
• The borrower sells the property.
• The borrower moves out of the home.
• The borrower fails to provide reasonable upkeep or pay property taxes.

Once the homeowner client sells their home, the lender has first right to the proceeds to recoup any outstanding balance on the reverse mortgage (unless there is also a lien on the home for unpaid property taxes). If the outstanding loan amount is less than the sale price, the homeowner or their next-of-kin will receive the difference.
Are There Limits on Selling a Home With a Reverse Mortgage?
The maturity date of a reverse mortgage is most often when the borrower sells their home. With a traditional mortgage, you expect the home's value to exceed the remaining balance of their mortgage at resale. However, because the borrower of a reverse mortgage is typically being paid in installments, the mortgage principal increases rather than decreases. Therefore, it could be that the loan amount eventually exceeds the resale value of the borrower’s home. 
What If the Home Has Lost Value?
For a homeowner whose property value has fallen below the amount they borrowed on a reverse mortgage, a short sale may be necessary if the homeowner wishes to sell. Fortunately, reverse mortgages are known as “nonrecourse loans,” which means the lender cannot go after the homeowner or their heirs for the difference between the outstanding loan amount and the final sale price of the home. However, short sales require the lender’s buy-in before you can list the home at a lower value. As such, the lender may require an appraisal to confirm the value before agreeing to the listing.