Can you Short Sale a Reverse Mortgage

Michael Branson     1/3/11 2:02pm

Question from one of our readers:

“We want to leave our house and return to our hometown. We have Wells Fargo reverse mortgage and our house is worth 1/2 of what we purchased it for. Can we get a short sale and leave the house? We do not want to live here anymore. We have our reverse mortgage with Wells Fargo and understand they turn down Short sales on Reverse mortgages. Please advise if you can. Thanks - Darlene”

question and answer

Hello Darlene,

A reverse mortgage is still a mortgage. The first step you should take is to contact a knowledgeable Realtor in your area and determine what the homes are actually selling for and have the Realtor prepare a comparable data sheet with that sales information. You know what your outstanding balance is, so if those sale prices are less than what you owe on your mortgage, you need to contact your servicer with the data to find out what options you actually do and do not have. Just as with any other mortgage, there are always choices and consequences with any decisions you make.

If the lender tells you that they absolutely will not work with you on the value/loan balance for the purpose of selling the property, just as with any other loan, you still have the decision to make as to whether or not you continue to stay in the home and honor the reverse mortgage agreement, or leave the property anyway forcing the lender to foreclose on the home or give them a Deed in Lieu of Foreclosure. A short sale may or may not have negative effects on your credit, but a foreclosure or Deed in Lieu of Foreclosure certainly will. That is a big decision and one only you can make.

In one way, borrowers with reverse mortgages are in the same predicament as borrowers with traditional or forward mortgages. Their homes lost as much as 50% or more of its value and now the lien are greater than the value of the home. The big advantage of the borrower with the reverse mortgage is that while the home may be over-encumbered, the borrowers can live in the home, payment free, for life and when borrowers do pass or are forced to leave the home, the loan is a non-recourse loan so the lender can only look to the property to repay the debt if the borrowers or their heirs do not want to sell the home and repay the debt themselves. The reverse mortgage is intended to be the last loan you ever need. If you make the choice that you just don't want to live there anymore and do not pay the loan back, then you would be in default of the reverse mortgage agreement.

It's a big decision. To default and allow the lender to foreclose would certainly impair your credit and make it difficult to obtain another home loan in the future. Defaulting on a federally-insured program would make you ineligible for any future HUD related programs. You would certainly be well-advised to check with the local realtor and your servicer before you took any actions to see where you really are and then do a lot of heavy consideration to determine if a move at this point is necessary or if it might be more prudent to wait a bit and see if the market turns around in the next few years. We would never advise a borrower to default on any loan, reverse mortgage or otherwise.

Be sure to also read a similar blog entry: Can you Leave Your Home in a Reverse Mortgage




3 Comment(s)
Orlando
7/25/12 8:02am
A non recourse loan the owners are not reponsible for any short fall period, there credit would not be damaged.
EVELYN
2/25/13 9:21am
We have a reverse mortgage, tried to sell on MLS for over 1 year and did not sell. We are now doing a short sale on this reverse mortgage and have a contract agreeable to the bank. My question is, if you do a short sale on a reverse mortgage (which is not in any default whatsoever) and when you complete t he short sale, can you immediately do a new reverse mortgage on another home that you own? We would perminantly change our address to the new home immediately. Is there a waiting period before you can do a reverse mortgage after you already had one that you short sold?
Mike Branson
2/25/13 1:32pm
Hi Evelyn, On a short sale, there is still a loss to the bank on which HUD has to pay a claim. As long as you have a balance owing that created a loss on any government insured loan (FHA forward or reverse, SBA loan, government insured student loan, etc), you would not be eligible for another government insured loan. HUD guarantees that you and your heirs will never owe more than a property is worth but by selling it now, you are assuring that there is a loss on the property. The reverse mortgage is meant to insure that you never have to make a monthly payment on your home and can live there for the rest of your life by only having to pay the taxes, insurance, upkeep and any other expenses on the property. When you make the decision to sell the home and move, neither HUD nor the lender can look to any other assets to repay the loan, but since you made the decision to sell the loan at a loss when you could remain living in the home, HUD also will not approve you for another reverse mortgage unless you paid back any and all sums that they had to pay out as a result of that decision.



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