Financial planning for senior homeowners in the United States was changed forever in 1988 when President Reagan signed the law that launched the Home Equity Conversion Mortgage (HECM) under HUD’s oversight. Commonly called a reverse mortgage, a HECM loan allows seniors to conveniently access the equity in their homes while continuing to live in them. Prior to this important legislation, many seniors found themselves house-rich and cash-poor. There was no effective way to access the equity they had accrued in their homes short of selling the residence and having to move out. For many, this dilemma created a desperate situation without an easy remedy. The HECM legislation changed that no-win predicament immediately.
A Consistently Growing Program
While there has been a continual stream of changes and refinements in the actual HECM loan process, this financial tool has proven to be quite popular. As of 2016, there are more than a million reverse mortgages outstanding—and more are being taken out each month. Those of us at Tania Ivey Home Selling Team powered by Berkshire Hathaway Pen Fed Realty have encountered some of the special issues involved with selling a home subject to a reverse mortgage. In fact, as pointed out by Marc Cormier, “The listing and sales process for a home with a HECM loan pretty much starts the same way as most residential properties. However, there are some unique features and requirements you have to pay attention to in the process.” With increasing numbers of seniors who originally took advantage of reverse mortgages passing or moving into senior living communities and nursing facilities, you may encounter such sales transactions on a more frequent basis.
Understanding the Concept: What is a Reverse Mortgage?
In simplest terms, a reverse mortgage allows seniors that meet certain requirements to secure financing based on the equity of their current residence. An overview of those requirements includes:
- Having reached the age of 62 or older
- Owning a residence outright or with sufficient equity to support the loan
- Living in the residence at the time of seeking the mortgage
There are other requirements, including receiving counseling, but the first three above are necessary to get to the next step in pursuing an FHA HECM loan. As noted, however, an increasing number of seniors now meet these tests and use reverse mortgages as a part of their retirement planning processes.
Insights into the Disadvantages and Stipulations of a Reverse Mortgage
Turning to Marc Cormier on the issue of reverse mortgages, we find that there are certain disadvantages that come with this financial planning option, especially when dealing with the reverse mortgage after the death of the homeowners. Cormier explains, “The sale of a residence mortgaged with a HECM loan can face complications depending on the situation. The typical scenarios we encounter at Tania Ivey Home Selling Team powered by Keller Williams Realty include: competent seniors wishing to sell and move into a managed residential facility, family members attempting to assist a senior no longer able to handle such issues, heirs or estates seeking to sell a property after the passing of the owners, seniors facing the inability to pay their property taxes or other costs, and heirs or estates facing foreclosure due to a triggering event or default.”
Regardless of the reason for the sale, there are a number of factors you must remember if you are seeking to list a home with a reverse mortgage. For example, there are specific deadlines for when a HECM loan must be paid off once the owners have permanently vacated the home, either voluntarily or due to death. Additionally, it is important to verify the authority of the one seeking to sell the home if it is not the living senior. If the sale is being initiated by an administrator or trustee, specific documentation must be provided of their authority to do so.
Ensuring the Estate Follows the Right Steps
Because of these multiple scenarios and specific timelines, you must take the time and effort to ensure your sales process is handled properly. According to Cormier, “Our first step is always to verify the authority of the individual who is initiating the sale, especially if the owner is deceased. We will take the lead and seek written authorization from the estate to talk to the mortgage servicing company. “Along with this authorization, we will obtain other vital information. We will also want to verify the total outstanding debt and whether or not there is an existing appraisal. Those three items allow us to move forward with starting the process with a valid listing contract in place.” An additional point made by Cormier is that it is important to determine whether the death of the owner has triggered a demand letter from the mortgage servicing company. It is important that all the participants on the seller’s side understand that the servicing company is quite often not the company that originated the loan. Rather, they are responsible for handling the loan and its satisfaction. As a result, they will be directly involved in the sale. Continuing with the scenarios of the owner of the property having deceased or permanently moved out of the residence, the date of death or moving is a default event and establishes the event date. All the timelines dealing with a HECM sale are driven by this date. By law, the loan on the property secured by a reverse mortgage is to be satisfied within six months of that event date. The servicing company handling the property’s loan will issue a notice of default within 30 days, based on the event date. This type of default is a bit different from the normal financial default for failure to make payments in that it is notifying the mortgage holder of the six-month requirement. Normally, at the end of that time or before, the servicing company will schedule an appraisal by an approved FHA appraisal, and that will be important to the process.
If that six-month deadline is not met, the foreclosure process is initiated.
Since the real estate agent is often brought in after these timelines are already running, it may be necessary to apply for a 90-extension. This may be granted if certain specific steps are taken and/or evidence of a need for the extension is presented. Marc Cormier summed up the important points for handling a HECM property with the advice, “If you are representing an estate, it is important to consult your real estate agent as early in the process as possible. Professionals such as those at Tania Ivey Home Selling Team powered by Berkshire Hathaway Pen Fed Realty will take the lead to ensure the sales process is as efficient and prompt as possible.”
Assisting Parents Who have a Reverse Mortgage
If you are the child or loved one assisting parents with their needs, you may have helped them secure an FHA Home Equity Conversion Mortgage. On the other hand, you may just be getting involved and have discovered they have what is called a reverse mortgage in place.
Reverse Mortgage Basics
In either case, it is important to understand this important financial planning tool for seniors. The original legislation for establishing these reverse mortgages was signed into law in 1988. The goal was to remedy a significant problem many elderly faced from a financial perspective.
Having paid off their original mortgages and, in many cases, gaining significant increases in the value of their homes, seniors had no viable way to tap into this wealth without moving and selling their residence. The reverse mortgage has the overriding advantage of providing income while eliminating the need to move. If you assisted in the process, you know there are a number of requirements associated with a reverse mortgage. However, the basics for obtaining HECM financing are straightforward, and include:
- Reaching the age of 62 or older
- Being the owner of a residence with sufficient equity to support the loan after paying off any balance on any other loan
- Residing in the home when securing the mortgage
Transferring the Home’s Ownership
Since more than a million senior homeowners have taken advantage of the HECM as a powerful financial planning tool, more and more children and heirs are faced with the issues related to what happens after their loved ones pass or move out of the home. Marc Cormier on the reverse mortgage and a member of the Tania Ivey Home Selling Team powered by Berkshire Hathaway Pen Fed Realty notes, “Understanding the timelines pertaining to a reverse mortgage are important considerations because either death or permanent move creates what is called a default event and establishes an event date.” Cormier continues, “All reverse mortgages backed by FHA require the loan to be satisfied within 6 months of such an event. There are a number of factors and specifics involved, but we work with clients to meet these dates, or to secure a potential extension of the deadlines.”
Assisting the Owner
If you are handling the disposition of a property for a still-living senior, the most important first step is to secure authority for the transaction. If the owner is not incapacitated, that can be handled with a simple letter or they can execute documents themselves. Otherwise, you will need to ensure you have written authorization to proceed. As pointed out by Cormier, “The first step in selling a home secured by a reverse mortgage is contacting the company that is handling the mortgage, the servicing company. With the proper authorization, they can provide the pay-off balance needed to satisfy the mortgage.” You can actually bring in an experienced agent, such as those you will find at Tania Ivey Home Selling Team to handle this process. “However, it is important to verify,” advises Cormier, “that the agent is familiar with the special issues surrounding reverse mortgages.” He notes, for example, “Having a proper appraisal provided by a certified FHA appraiser is essential when dealing with a reverse mortgage. That is because the outstanding balance of the debt requires payment of the lesser of paying off the total balance or 95 percent of the appraised value.” This provides the potential of what is commonly called a “short sale” in certain circumstances. As a final point, Cormier notes the same FHA requirement for an appraisal to be current (within 120 days of closing) applies to a HECM.
Dealing with Defaults
If the owner of the home falls behind on property taxes or defaults on a reverse mortgage, they will face default and potential foreclosure as with any other mortgage. If you are unable to assist in keeping the payments current, it is important to consult a realtor who can help you understand the actions necessary to avoid foreclosure or other circumstances.
Matching Your Needs to FHA Timelines
By contacting an experienced realtor early in the process of dealing with a reverse mortgage, you can maximize your options. For example, scheduling your parents’ move into a nursing facility can be planned to know that the event starts the 6-month clock. You can delay that move until the sale if the proceeds are necessary for the new facility, or you can plan around the sale accordingly. Likewise, getting a comparative valuation before ordering an appraisal will help you understand precisely what proceeds from a sale might provide. This will give you important information without starting the 12-day appraisal clock and requiring a second appraisal later in the process. In the case of a default event of either death or moving out, the servicing company is required to order an appraisal within 30 days. If they do not have access to the interior of the property, they will accept an external appraisal at that time. However, as discussed below, most situations will require a full appraisal by an approved appraiser. After the 30-day period you will receive a default letter, notifying you of the fact that the mortgage must be satisfied not later than the six months after the event date.
Retaining Ownership of the Home
Many heirs and family members desire to retain ownership of a property once their loved ones pass or move out. In that case, it is important to understand the timelines invoked by the move or death.
Marc Cormier points out, “If a family or an heir desires to purchase the property, they can simply submit the pay-off amount. If it is based on a full interior appraisal by an appraiser on the FHA list, the balance will be the amount due or, potentially, only 95 percent of that value.”
If you are seeking financing for the home, you have six months to do so. However, you may find it takes longer, and you can request a 90-day extension to complete the purchase. Often, that extension requires you work with your agent to submit one or more of a:
- MLS agreement
- Mortgage approval
- Financing application
You also have the possibility of a second 90-day extension in certain circumstances, potentially giving you a full year to complete the purchase.
Taking the Proper Steps
While you may be facing emotional matters while dealing with parents who are incapacitated or recently deceased, it is important to ensure you are proactive in dealing with any property financed with an FHA HECM.
Cormier summarizes this point with, “The professional agents at Tania Ivey Home Selling Team have invested heavily in understanding how to properly and efficiently handle the sale of a home financed with a reverse mortgage. We understand this is often a challenging time for the families and heirs, and we take pride in making the process as hassle-free as possible.”
You can ensure you have peace of mind and the information you need during the process of selling an inherited house with a reverse mortgage by choosing to work with an experienced realtor.