A reverse home loan, commonly known as a Home Equity Conversion Mortgage (HECM), allows seniors to convert part of their home equity into cash without having to sell their homes. However, situations may arise where you decide to sell your house while you have a reverse home loan in place. Understanding what happens in this scenario is crucial for informed financial planning.
When you sell your house that has a reverse home loan, the loan must be paid off. The proceeds from the sale are typically used first to settle the outstanding balance of the reverse mortgage. This balance consists of the money you borrowed along with any accumulated interest and fees, which may have increased over time.
After the sale, if the selling price of your home exceeds the loan balance, the remaining funds will be yours to keep. For example, if you owe $200,000 on your reverse mortgage and sell your house for $250,000, you will receive the remaining $50,000 after paying off the loan.
Conversely, if the sale price of your home is less than what you owe on the reverse mortgage (this could happen in a declining market), the Federal Housing Administration (FHA) protects you from owing more than the home is worth, thanks to the non-recourse feature of reverse mortgages. The lender will absorb the loss, and you are not personally responsible for repaying the difference, as long as you have kept up with the loan terms.
It's important to remember that selling your home affects your eligibility for the reverse mortgage program. Once you sell the property, the reverse mortgage is essentially terminated. If you are considering a downsize or a relocation into a new home, you may have the option to transfer the reverse mortgage to a new property, but this will depend on the new home meeting FHA requirements.
Before making any decisions, it is wise to consult with a financial advisor or a reverse mortgage specialist. They can provide insights into how the process may impact your finances and assist you in planning for your next steps post-sale.
In conclusion, selling your house with an existing reverse home loan requires careful handling of finances and potential consequences for your equity. By understanding the implications and preparing in advance, you can make informed choices that best suit your needs.
