Reverse mortgages offer a way to turn your home equity into income without having to sell the property. If you take out a reverse mortgage, you don’t have to pay monthly principal and interest payments. Instead, the lender makes payments to you, either monthly or in a lump sum.
Although a reverse mortgage might sound like free money, it’s actually a loan—which comes with interest and fees. Most reverse mortgages are insured by the Federal Housing Administration (FHA), which requires borrowers to be at least 62 years old and occupy the property as their primary residence, among other criteria.
But what happens to your reverse mortgage if you eventually want to sell the home, or if you need to move for medical reasons? What if you pass away and your heirs want to sell the property? Let’s explore how selling a home with a reverse mortgage works, depending on the situation.
- You can sell a home with a reverse mortgage loan on it. Once you do, you’ll need to pay back the loan.
- If you sell for at least the balance due on the reverse mortgage, you can keep any amount over that balance.
- If you owe more on the reverse mortgage than the home is worth, and you sell for at least the market value, mortgage insurance will cover the remaining balance.
- If you are in default on the loan, you may sell the home for 95% of the appraised value or the amount you owe, and mortgage insurance covers the balance.
Can You Sell a House With a Reverse Mortgage?
Yes, you can sell a home with a reverse mortgage on it. Several different types of reverse mortgages are available and they work in the same general way when it comes to selling. The two most common types of reverse mortgages are:
- Home Equity Conversion Mortgages (HECMs) through FHA-approved lenders
- Proprietary reverse mortgage loans from private lenders
Private lenders and HECMs both require you to pay for mortgage insurance, which comes into play when you sell a home with a reverse mortgage.
Mortgage insurance is different from homeowners insurance because it insures the lender, not the homeowner. If you have a reverse mortgage, you’ll need both types of insurance.
What Happens When You Sell a Home With a Reverse Mortgage
You may voluntarily sell your home anytime during the period of the reverse mortgage. If you sell for at least the loan balance, the loan is considered to be fully paid, and you may keep any money left over after you’ve paid the lender. If you owe more on your reverse mortgage than the home is worth and you sell for the appraised market value, your mortgage insurance will cover the remaining balance.
Payments you receive on a reverse mortgage aren’t considered income, and you don’t have to pay taxes on these payments. If you sell the home, the amount you must pay back will include interest on the loan. You may be able to deduct this interest by including it on Schedule A of your income-tax form for the year when you sell the home and pay back the mortgage.
Selling in Default or Foreclosure
You must meet three specific requirements to maintain your reverse mortgage:
- Your home must be your principal residence.
- You must pay property taxes and homeowners insurance bills on time.
- Your home must be kept in good condition.
If you no longer meet one or more of these requirements, you may be in default on your reverse mortgage.
If you are in default, you may sell your home for the lesser of 95% of its appraised value or the amount owed on the loan. The money from the sale is used to pay down the outstanding loan balance, and mortgage insurance pays any remaining balance.
When you can’t repay the loan and the loan is in default, the lender can collect on the amount of the loan by foreclosing, or conducting a court-ordered sale of the home.
If you receive a foreclosure notice while you’re actively working to sell the property, notify your lender immediately to request a delay on the foreclosure.
Reverse Mortgages After the Borrower’s Death
What happens to a reverse mortgage after the homeowner’s death depends on whether they had a co-borrower on the loan. For example, if the spouse was a co-borrower and continues to live in the home as their principal residence, they may continue to receive the benefits of the reverse mortgage and stay in the home as long as they continue to meet the conditions of the loan.
If the spouse didn’t sign the paperwork for the reverse mortgage, such as if they weren’t old enough to qualify, they may be able to continue living in the home if they qualify as an eligible non-borrowing spouse under HUD’s rules. While the spouse doesn’t have to pay off the loan, they won’t continue to get money from the reverse mortgage.
If the spouse doesn’t qualify as an eligible non-borrowing spouse, or the borrower was the only person living in the home, the loan must be paid back. The spouse or heirs can sell the home and use the proceeds to repay either the full reverse mortgage balance or 95% of the home’s appraised value, whichever is less. If the home sells for less than the balance owed on the reverse mortgage, FHA mortgage insurance will cover the difference.
Of course, if the heirs want to keep the home, they may pay off the reverse mortgage with other funds.
If you need help dealing with a reverse mortgage after the death of the borrower, the Consumer Financial Protection Bureau (CFPB) recommends seeking help from a lawyer or a HUD-approved housing counselor.
When Do You Have To Sell a Home With a Reverse Mortgage?
Reverse mortgage lenders have strict requirements for both borrowers and properties:
- Borrowers must be 62 years of age or older
- The home must be the borrower’s principal residence
- The property must be kept in good condition
- Homeowners must remain current on property tax and home insurance payments
If you don’t meet these conditions, you may be forced to sell your home.
For example, if you no longer use the home as your primary residence, the lender may require you to pay back the reverse mortgage. Check your mortgage documents for specific reasons for not living in the home that may be allowed (such as receiving inpatient medical treatment). Notify your lender of your situation so they know you intend to continue to use the home as your principal residence.
If you miss payments on property taxes, insurance, or homeowner association fees, the loan may go into default, which could lead to a forced sale. To avoid this situation, aim to make up the payments as soon as possible. If you can’t afford to make the payments, the CFPB recommends contacting your local Area Agency on Aging to learn about assistance programs.
Frequently Asked Questions (FAQs)
How much do you repay on a reverse mortgage when you sell the property?
When you sell the property, you must repay the loan at its current balance. You may keep any excess over the amount of the loan balance. If you owe more than the house sells for, mortgage insurance typically covers the difference.
How long do you have to sell a house with a reverse mortgage?
You can sell the house anytime after you have the reverse mortgage, as long as you are able to pay off the loan, including the interest and any fees. After the borrower’s death, the heirs have 30 days from the time they receive the due and payable notice from the lender to sell the home, buy it themselves, or turn it over to the lender to satisfy the debt.
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