How to Purchase a Home That Has a Reverse Mortgage

By Michael G. Branson Edited by Cliff Auerswald 96 comments

We were looking to buy a home and signed a contract for sale for $730,000. The house appraised for just over that amount. Afterward, we learned that the seller owes more than that ($760,000) on a reverse mortgage. Does HUD/FHA need to approve the sales price before we can close? The seller can complete the transaction because the sales price is within 95% of the amount owed. Does HUD/the lender get to keep the difference between what is owed and the sales price?

Are you sure that it is a HUD HECM? That balance looks pretty high for the HUD loan. While it is possible that it was one of the earlier fixed-rate loans for an older borrower with a full draw, it would not be easy to get that high otherwise unless it was a jumbo or proprietary reverse mortgage. If so, it is a whole different animal.

I can’t say for sure based on what information I have here. If the loan was done on a proprietary or private program, I could not make the same assurances about the options. If it were the HUD program, if the borrowers have passed, the lender would allow the borrower’s heirs to pay the loan off and keep the home at 95% of the current market value, but there is no option to sell the home for a short sale and let the heirs keep 5% of the sale proceeds.

If the heirs pay off the reverse mortgage at 95% of the current market value and sell the home later, they may certainly do so, but that would be a completely separate transaction. I’m not sure what you mean by “does HUD/lender get to keep the difference between what is owed and what the sales price will be” because you indicated that the sales price is less than what is owed.

Since that number is a negative number indicating a loss and not a surplus on the sale, nothing remains “to keep.”

If HUD insures the loan, as would be the case with a HUD HECM reverse mortgage, then yes, the lender and ultimately HUD would have to approve the terms of the short sale (short sale is a sale for any amount short of the full amount needed to pay the loan off wherein the owner of the property is not bringing in the money to make the lender whole and is requesting the lender to take the loss and accept the sale price as payment in full).

Lenders always have the prerogative on short sales to approve or deny the terms because they want to be sure that the sale is at the current market price, is a bona fide “arms-length” transaction, and not simply a transfer between two known parties at an agreed upon price that is less than what the property would bring on the open market that would unduly injure the lender and HUD.

Once they determine that the price offered is a fair market price and not a below market price for the property and that the sale is in their best interests, after all, if HUD realizes that it will spend as much or more to foreclose and take the property than the market and sell it, it is also in its best interest to allow the sale if they believe it to be a bona fide transaction.

Top FAQ’s

Can I buy a house with a reverse mortgage on it?

Yes, you can, but the loan is due and payable and must be repaid. This is often overlooked when someone buys a home at auction (especially an HOA auction), where the purchaser thinks they are getting a very low price, only to find out later there is a reverse mortgage on the home. Then, to make matters worse, the outstanding balance on the reverse mortgage may be equal to the home’s value, but even if not, that loan is due and payable, and the purchaser has no additional funds to pay the loan off. If you plan to buy a home with an existing reverse mortgage, remember that the loan will need to be paid in full after the original borrower sells the property according to the terms of the legal documents.

Can you sell a house when you have a reverse mortgage?

You can sell the home and pay the loan off with no prepayment penalty any time you like. You own the home, and you have the right to sell it whenever you choose.

Can you transfer a reverse mortgage to a new home?

Reverse mortgages are not transferrable. You can only have one reverse mortgage at a time because it must be on your primary residence. If you sell your primary residence or otherwise move from your primary residence, that loan becomes due and payable. Once paid in full, you can receive a new reverse mortgage on the new property (subject to your qualifications and the property qualifying under the program eligibility requirements).

How do you buy a house back after a reverse mortgage?

Reverse mortgage borrowers do not need to “buy back” their home after a reverse mortgage because they never sold it. Borrowers always own their homes with a reverse mortgage. A reverse mortgage is a loan, and just like every other loan, you are using the property as security for the loan. The loan is a lien against the home until it is repaid (as would be the case when you sell the home, refinance it, or otherwise pay the loan off with other funds). But since you own the home, the title stays in your name throughout the process.

What is a short sale on a reverse mortgage?

A reverse mortgage short sale is when the amount owed on the property is higher than the value of the home, and the homeowner must seek permission from the lender to sell the property for an amount less than the amount owed on the loan with the lender still accepting the sale proceeds as payment in full for the debt. Not often does it make sense to approach a lender and request permission to accept terms for a short sale on a reverse mortgaged home. If the borrowers have passed, there is no recourse on a reverse mortgage. There are no proceeds to be received from the sale for heirs, so it is probably best to contact the lender and discuss letting the lender take the property via a Deed in Lieu of Foreclosure rather than going to the expense and time to market the home when there are no sale proceeds afterward anyway. Suppose the individual who wishes to keep the home is the borrower’s heir. In that case, there is a provision in the loan that allows the heir to repay the loan at 95% of the outstanding loan balance or 95% of the current market value, and that would not be considered a short sale anyway. It is not a sale if the heir obtains title through an inheritance. Every so often, borrowers find that they can’t live in a home any longer (i.e., medical reasons, etc.), and they decide to sell the house, not knowing its actual value. Only after they put the home on the market did they find that their pattern of cash extraction, the lack of appreciation in their market, and interest accrual after a long time when they have been living payment-free has allowed them to live comfortably but also allowed the loan to rise above the value of the property. When that happens, they can request that the servicer approve a specific sale transaction to pay the loan off at less than the full amount owed. The lender would need to review the terms, determine if it is a bona fide sale between unrelated parties, and appraise the property. Next, HUD would probably need to approve the terms as this would create a claim to the MIP fund for the loss on the payoff amount. If HUD determines that the circumstances are such that the sale is within acceptable parameters and will result in no more loss than they would experience if they took the property back and sold it themselves, they would probably approve the short-sale offer. Still, the original borrower would not be eligible for other HUD/FHA-insured financing until that loss was repaid.

Experts Area: Heirs and Maturity

Michael G. Branson CEO, All Reverse Mortgage, Inc. and moderator of ARLO™ has 45 years of experience in the mortgage banking industry. He has devoted the past 19 years to reverse mortgages exclusively.

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Looking to buy a house with a reverse mortgage on it. The original owner is deceased and left the house to his children. They are unable to pay the outstanding balance of roughly $450,000. The original reverse mortgage was only paid out to $250,000, but monthly payments were never made, and the interest and fees account for the additional $200,000 owed. The house is assessed at $355,000. What is the lender or HUD likely to accept as an offer given these figures? Will they want 95% of the $450,000 owed or 95% of the assessed value? I'm sure the "appraised market value" is slightly higher because of the area, but the house is 60 years old and is in need of a $30,000 bulkhead along the canal, and renovations to the house are probably $50,000 plus. Do they take these things into consideration?

Michael Branson August 6th, 2024

The heirs have the option to repay the loan at the outstanding balance owed or 95% of the current market value, whichever is less. The value is determined by an appraisal from a HUD-approved appraiser based on current sales, adjusted for the characteristics of the property, including its condition compared to others that have sold. The amount HUD will accept for the payoff of the loan does not consider the original loan amount or the "assessed value."

Since the appraisal compares the property to other recent sales, the appraiser takes into consideration both property differences and needed repairs, making adjustments where necessary to determine the value. If the recent sales are in the same condition as the property you are considering, then no adjustment is required. However, if the recent sales were in better condition, did not require repairs, or had been remodeled, the appraiser will adjust accordingly.

Keep in mind that HUD cannot sell the house to you or negotiate a payoff with you since they don't own the home. They will only do that with the borrower or their heir. If the heirs do not make arrangements to repay the loan, HUD would need to gain title to the home through a foreclosure sale or Deed in Lieu of foreclosure. They would then sell the home on the open market, and it would no longer be subject to any terms of the previous mortgage. You would approach them like any other buyer of a property, make an offer, and they would be free to accept, decline, or counter.

We obtained a reverse mortgage back in 2008. The original loan amount was $300,000, but it is now $727,000. The home is valued at approximately $460,000. I would like my son to purchase this house. How can we do this with the loan being so high now?

Michael Branson May 13th, 2024

If you're forced to leave the home because you must go to an assisted living facility, you should contact your servicer and advise them that you must vacate the property and that you would like the option for your heirs to pay off the loan at 95% of the current market value. Since you are not leaving because of a choice you're making, they will give you all the options available for your heirs.

However, if you're just thinking you'd like to leave and it's not the result of the death of the borrower(s), the lender is not required to offer the payoff option at 95% of the current market value. This is because borrowers cannot pick and choose when they would like to time the market to pay off the loan at 95% of the value. Heirs have the option to pay the loan in full at the lesser of the amount owed or 95% of the current appraised value for certain when the borrowers die, but other than that, the loan allows borrowers to remain in the home for life without the option to choose the market of their choice to sell to a relative or other related party at certain loss to HUD when the market could rebound mitigating that loss later.

If no external factor forces the move, borrowers may remain in the home, values may rise, and that shortfall may be less later. HUD is willing to take the risk that they will lose money on the loan, and they've taken those risks into consideration. But if you feel you must move even though there has been no death of the borrower, you should contact your servicer to determine what your options are at that time.

My husband, who is 81, and I, who am 72, obtained a reverse mortgage in 2020 to finance the addition of a bathroom to our home, purchase a shed, and pay some bills. Then COVID-19 struck, our contractor went out of business, and the project was not completed until 2023. Our house was valued at only $140,000 in 2020, which meant the amount we could borrow did not fully cover the other repairs we needed. I understand that we cannot borrow more without refinancing, even though the value of our home has increased. However, we receive advertisements from various reverse mortgage lenders suggesting otherwise. Is there anything new, like "New Options to Improve Current Terms"?

My main question, however, is the following. If we decide to move, can we purchase a $300,000 house with a new reverse mortgage, contingent on selling our current one for $300,000? We currently owe $101,300 on our Home Equity Conversion Mortgage (HECM) and have about $8,000 in the bank. Would a new reverse mortgage be limited to half the value of the house? I am concerned that we will soon owe so much that moving, if necessary, will not be an option.

Michael Branson March 21st, 2024

No new options would allow you to add funds to an existing reverse mortgage. You can refinance the loan, and yes, you can also move and use a new reverse mortgage to purchase the new home.

As was the case the last time you obtained your loan, the amount available to you will be based not only on the ages of the borrowers and the value of the homes but also on current interest rates. Rates have not started to drop yet, but many believe they will when we get closer to election time or when inflation starts to drop. Falling rates would increase your purchasing power with a reverse mortgage.

My grandmother recently passed and had in her sole name a property with a reverse mortgage, the home I have lived in all my life. She has two heirs, my aunt, and my mother. The two of them want to either appraise the house to fix then sell or sell as is, paying off the

a reverse mortgage, then split what's left over. I want to buy it but for a price that will cover the reverse mortgage and then put some money in their pockets. What's the best way to go about this?

Michael Branson January 5th, 2024

Just as you would with any other loan, you need to have enough money available to pay off the existing loan plus whatever it will take to purchase the property. For example, if your grandmother owes $100,000 on the reverse mortgage and it will take $50,000 for each of your mother and your aunt to let you keep the home, you will need access to $200,000 to buy them out of the property and keep the home.

You could do that with $200,000 of your own funds or with a new loan. How much of a loan you could get and what you would need to put down of your own funds would depend on the appraised value, your income, and credit and loan program parameters for which you qualify.

Michael Branson January 5th, 2024

If you are talking about the legal owner who is the borrower on a reverse mortgage loan, he/she/they owns the property and has all the same rights as any other homeowner with a loan on the property. That loan would need to be paid in full when the sale was completed.

If you are talking about any other party, I suppose it would depend on their legal right to sell the property, and your concern would probably be whether the loan was already in default and if the lender had filed a notice of default. If so, the foreclosure sale could take place before your anticipated purchase, so you may want to check before you pay anything for that right, but that's your call.

I always advise seeking professional counsel from an attorney or licensed real estate agent to help ensure you are protected if you need to put money into the transaction at the start.

I am trying to buy a house that has a reverse mortgage, and the mortgage holder died two years ago. The house is in ill repair. The heirs do not live in it and are not receptive. What steps do I need to take to purchase this house?

Michael Branson December 27th, 2023

It depends on who owns the property. If the original owner or the heirs still own the property, then the only way you can purchase it is by getting someone who has the authority to sell it to agree to terms. If the lender has already completed a foreclosure process and now has title to the home, you could contact their servicing department and ask them what the process would be to purchase real estate they own. I would advise you to first contact a title company to verify the property's ownership and whether there are any pending actions (foreclosures, etc.). Unless you know who the players are, how do you know who to deal with?

The most challenging part may be finding the heir with the right to sell the home. When you say the heirs are not receptive, it may just be that whoever you've spoken with may not be able to speak for the property. If there is a quick and easy way to determine who a person left their home to, if it isn't their immediate children, I honestly do not know how you can do it. It may still need to go through probate through a court. It may be that the rightful heir has not been found yet, and it could be that the heir is not interested in the property but has not notified anyone of their intentions, and the lender is not moving quickly to foreclose on the property. I can't tell you what you can do if the title is still in the original borrower's name and no one is stepping forward to claim the home. But you should start with the title and go from there. A real estate attorney may be able to assist you. I am unsure if there is a public document filed for probate issues that they can check, but it's worth a try.

Michael Branson December 27th, 2023

It depends on who owns the property. If the original owner or the heirs still own the property, then the only way you can purchase it is by getting someone who has the authority to sell it to agree to terms. If the lender has already completed a foreclosure process and now has title to the home, you could contact their servicing department and ask them what the process would be to purchase real estate they own. First, contact a title company to verify the property's ownership and whether there are any pending actions (foreclosures, etc.). Unless you know who the players are, how do you know who to deal with?

The most challenging part may be finding the heir with the right to sell the home. When you say the heirs are not receptive, it may just be that whoever you've spoken with may be unable to speak for the property. If there is a quick and easy way to determine who a person left their home to, if it isn't their immediate children, I honestly do not know how you can do it. It may still need to go through probate through a court. It may be that the rightful heir has not been found yet, and it could be that the heir is not interested in the property but has not notified anyone of their intentions, and the lender is not moving quickly to foreclose on the property. I can't tell you what you can do if the title is still in the original borrower's name and no one is stepping forward to claim the home. But you should start with the title and go from there. A real estate attorney may be able to assist you. I am unsure if a public document is filed for probate issues that they can check, but it's worth a try.

I'm going to try my best to explain the situation. My parents had a reverse mortgage on their house and 3 acres, and it was foreclosed on. The real estate agent lists it, and I would like to make an offer, but the real estate agent says the bank that owns it now won't take a lesser offer on a reverse mortgage foreclosure. It has been listed on Zillow for over 260 days, and the price has dropped five times. According to the realtor, the bank won't take less than it is listed for. Is this true? Something about rules for reverse mortgage foreclosures. Where can I find those rules? Thank you!

Michael Branson December 24th, 2023

The rules you reference refer to the payoff of loans that have not yet gone through foreclosure. They allow the borrower's heirs to repay the loan's outstanding balance at the lesser of the amount owed or 95% of the current market value. With this option, heirs can keep the home and pay the balance in full for no more than 95% of the home's current value, regardless of what is owed if the balance is more than the current value. For example, if you were the heir (and I say "if" because I don't know if you have other siblings or if there are other family members who may have had claim to the title) and had contacted the lender before they foreclosed and took title to the property, you could have paid off the loan and kept the home for the amount owed or 95% of the value at that time, regardless of the amount owed if that was less than the full balance of the loan. For example, If the loan balance was $200,000, but the property was only worth $180,000, you could have paid the loan in full for 95% of the $180,000 or $171,000, even though that was almost $30,000 less than the amount owed. You didn't have to wait and "buy" the home; you already owned it at that point if you were the heir, and you just needed to make arrangements to repay the outstanding reverse mortgage by the options available to you at that time. If other family members were your parent's heir(s), the best thing to do would have been to get them to sign the property over to you before the foreclosure so you could have paid the loan off at the amount owed or 95% of the market value, whichever was less.

However, once the property goes through a foreclosure and the title to the home is no longer in the borrower's name or the name of the estate or an heir, there is no longer a right to pay the loan off at any set amount. If it is now a real estate-owned piece of property that the lender or HUD owns, it will be sold at whatever price the lender deems appropriate with HUD's approval. HUD will need to pay a claim on the loss, so the lender must get HUD's approval on any sale lower than the amount owed on the loan. Suppose the price you wish to pay is now below 95% of the market value at the time of the passing of the borrowers. In that case, neither HUD nor the lender are obligated to sell the home at any price now, let alone one below 95% of the previous appraisal they had obtained. Would they be wise to sell it to you if values had declined since their last appraisal? I believe it would be wise for the lender and HUD to sell the property at its current market value, so it may well be in your best interest and theirs to keep attempting to purchase the home if you want it. The price you want to pay is close to what other similar homes are selling for now.

The realtor may be correct, but have you prepared and presented an offer? It could very well be that the bank and HUD have received appraisals upon which they rely to determine their lowest acceptable price. Still, the only thing they can do if they don't like your offer to counter your offer with a heftier price is to accept, deny, or turn it down. Either way, there is nothing lost by submitting an offer except a bit of time, and if the agent you spoke with did not submit the offer you want to make, my advice would be to talk to another agent. If the person you are talking to is the listing agent discouraging an offer because others have been denied, I would go to another agent who is not with the listing broker and have them write the offer. They should be more aggressive because they don't have the listing, and the only way they would be paid on this transaction is if the sale goes through (you do not pay them a dime; they are paid through the listing fees).

I need info on how to buy a property back that was reverse mortgaged. Pay plan type- line of credit. The amount has doubled since 2011 when they did this.