After years (or decades) of dutifully paying down your mortgage, you have likely built substantial home equity. And if you're like many retirees, you might be house rich, cash poor if a big chunk of your net worth is tied up in the home. A reverse mortgage lets you tap into that equity without selling the home or adding to your monthly debt load. But what happens if you no longer want the home? Can you sell a house with a reverse mortgage? The answer is yes, and here's what you need to know about that option.
- A reverse mortgage is for homeowners who are 62 or older and want to tap into their home equity to pay for basic living expenses, medical bills, home repairs, or anything else.
- Your lender gives you an advance on your home equity—as a lump sum, line of credit, or regular monthly payments.
- Interest and fees (e.g., loan servicing) continue to accrue over the life of the loan.
- Repayment of a reverse mortgage is deferred until you sell the home, move out, fall behind on property charges (e.g., taxes and insurance), or die.
What Is a Reverse Mortgage?
A reverse mortgage allows homeowners who are 62 or older to access their home equity without selling the house or taking on extra monthly payments. When you're approved for a reverse mortgage, your lender gives you an advance on your home equity—as a lump sum, credit line, or regular monthly payments. Interest and fees accrue throughout the loan term while your home equity decreases. The loan becomes due when you sell the home, move out, fall behind on property charges, or die.
Most reverse mortgages have a non-recourse clause, which means you or your estate can't owe more than the home's value when the loan becomes due and the house is sold.
Types of Reverse Mortgages
There are four primary types of reverse mortgages:
- HECMs. The most widely used reverse mortgage is the home equity conversion mortgage (HECM), a loan insured by the Federal Housing Administration (FHA) and issued through FHA-approved lenders. HECMs are available to qualified borrowers with homes valued at up to $970,800. You can use the cash to pay for basic living expenses, medical bills, home renovations, vacations, etc.
- Proprietary reverse mortgages. You'll need a proprietary (aka jumbo) reverse mortgage if your home's value exceeds the FHA limit. These loans generally involve higher interest rates and fewer consumer protections than the federally insured HECM. Like the HECM, you can use the reverse mortgage funds however you see fit.
- Single-purpose reverse mortgages. State, local, and nonprofit agencies offer single-purpose reverse mortgages, which are generally the least expensive reverse mortgage option. However, there's one catch: You must use single-purpose reverse mortgage funds to pay for specific, lender-approved expenses, such as property taxes or home repairs.
- HECMs for purchase. This reverse mortgage product is like a HECM with one key difference: You can use a HECM for purchase to buy a new home. The home you buy must be your principal residence, and you must have the financial resources to pay substantial upfront costs, including a sizable down payment.
With a traditional mortgage, you build equity each month as you pay down the loan. You lose equity and increase your debt each month with a reverse mortgage.
Can You Sell a House With a Reverse Mortgage?
If you have a reverse mortgage, then you hold the title, and the lender has a lien. You can't be foreclosed on, provided you maintain the home and stay current with your property charges—including taxes, homeowners insurance, flood insurance (if required), and any homeowners association (HOA) fees.
The loan can be repaid at any time without penalty, so you can sell it if you want to, then maybe downsize, move closer to the grandkids, or relocate to a more favorable climate. You are also free to sell the home if you need to move out to enter an assisted-living facility or receive full-time care. The lender and the government (in the case of FHA-backed HECM loans) have no say in your decision to sell the home.
If you're selling a home with a reverse mortgage, run the numbers first to ensure you have enough home equity (or savings) to cover your loan payoff balance and any closing costs.
How to Sell a House With a Reverse Mortgage
You must repay your reverse mortgage loan when you sell the home, after which your lender will close the account. Here's a rundown of the basic steps:
- Contact your lender. Request a payoff quote (the loan balance), including any money you have received, accrued interest, and other fees. The lender will mail a due and payable letter within 30 days, specifying the current loan balance, options for repayment, steps to avoid foreclosure, and the number of days to respond. The lender will send an appraiser to determine the property's value.
- List and sell the home. When determining the price, consider your mortgage balance (from the due and payable letter) and closing costs. A real estate agent, broker, or Realtor can help set the price, handle showings, negotiate with potential buyers, and ensure a smooth closing. If your state requires it (or you just want legal representation), hire a real estate attorney to assist with the process.
- Close and transfer the funds. At closing, your reverse mortgage lender receives the loan payoff amount, and you receive any excess proceeds minus closing costs.
Interest, mortgage insurance premiums (MIPs), and homeowners insurance continue to accrue until the loan is paid and settled, so your loan balance will keep growing during the settlement period.
Are There Penalties if I Sell a Home With a Reverse Mortgage?
You hold the title to the home and can sell it whenever you like for any reason. There are no penalties if you sell the house and repay the loan.
What Is a Reverse Mortgage Maturity Event?
A maturity event is something that triggers the repayment of a reverse mortgage. A maturity event occurs when you:
- Sell the home.
- Permanently move out of the house (e.g., to move into an assisted-living facility).
- Fall behind on property charges, such as taxes, insurance, and HOA fees.
- Let the home fall into disrepair.
How Much Does Mortgage Insurance Cost?
If you have a HECM reverse mortgage, your lender will charge you a 2% upfront mortgage insurance premium (MIP) based on your home's appraised value, up to the $970,800 maximum lending limit.
After that, an annual MIP kicks in, equal to 0.5% of your loan's outstanding balance. Proprietary (aka jumbo) reverse mortgages don't generally require mortgage insurance, but they tend to have higher interest rates and fewer consumer protections.
The Bottom Line
When you have a reverse mortgage, you retain title to the property and are free to sell it anytime you see fit. However, the reverse mortgage loan becomes due if you decide to sell, so be sure your home's current value (or your savings account balance) is high enough to pay off the loan and cover the closing costs.
Mortgage lending discrimination is illegal. If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, file a complaint with the Consumer Financial Protection Bureau or the U.S. Department of Housing and Urban Development (HUD).