Many students have asked me “Can you short sale a reverse mortgage?” and I had informed them that I have never done one before. However, recently I have received two seller leads who have reverse mortgages that had asked for assistance in selling their homes. A Reverse Mortgage is different from a regular mortgage that a homeowner would receive.
A Reverse Mortgage is normally used by elderly individuals who owned their home free and clear that don’t want to have a monthly mortgage payment, want their equity out of the home and want to continue living in their home until their death. Here is my understanding of a reverse mortgage.
The Mortgage Company will give the homeowner a lump sum of 50 to 60% value on the property. However, the mortgage that is recorded is worth the entire value of the home. The homeowner is responsible to pay for taxes and hazard insurance on the home. The mortgage is secured by the home with no personal liability by the homeowner such as a Note. This type of mortgage is a non-recourse mortgage.
Upon the death of the Seller, the mortgage company will receive the Deed to the home. The Seller is not allowed to move out of the home or it triggers the “due on sale clause” allowing the lender to start a foreclosure action.
The first reverse mortgage I attempted to short sale, I had put on the Settlement Statement a relocation fee for the Seller. The short sale lender’s negotiator informed me that they would not allow the Seller to receive funds on the Settlement Statement from them or the Buyer. However, that such funds could be paid outside of closing. Well anyone who knows me knows that I never give money to Sellers outside of a Settlement Statement due to the fact that we sign an Arms-Length Affidavit which states all funds given to the Seller, if any, are on the Settlement Statement.
The negotiator and I went back and forth on several emails as she kept telling me to have the Buyer pay the Seller outside of the closing. She also provided me with some exceptions wherein a Seller could receive funds. She stated that the Seller could receive funds on the Settlement Statement if the Buyer was reimbursing the Seller for repairs made on the property.
The amount the Buyer wanted to pay the Seller was $11,400.00. I sent everything into the short sale lender showing that amount on the Settlement Statement being paid by the Buyer and she said “in writing” to remove it and pay it outside of closing. The Seller that I was dealing with decided after all of the negotiations to back out and just stay in the home until she died so … we never closed on that short sale.
Would I have closed and paid the Seller outside of closing? That I cannot answer as I had not received all the documents that the Buyer would have to sign at closing regarding the short sale. Should you decide to purchase a home from a Seller who has a reverse mortgage and pay them a relocation fee, I would still recommend that you get something in writing stating that “you are allowed to give money to a Seller outside of a closing” and put it on the Settlement Statement.
If you are an investor and you want to give money to a Seller doing a short sale as relocation money, you always need to get it approved by the short sale lender. Many lenders will pay Sellers’ from $1,000 to $33,000 just to do a short sale so as a Buyer, it is not necessary for you to pay the Seller.
I always tell the Seller that the Buyer is not allowed to pay you any money for the home but if the short sale lender wants to pay for a relocation fee, I will attempt to get it for them. If the short sale lender denies that request then the Seller closes without receiving any money. There is no outside of closing exchange of money.
I am now working on another reverse mortgage and will keep you posted if that negotiator insists “in writing” that the Seller can receive funds outside of closing. Always keep all your communication records with the negotiator and READ your Arms-Length Affidavit to make sure you are complying with the short sale lender. Remember, that you are signing the Arms-Length Affidavit stating that you could be found civilly and criminally responsible should you not disclose everything in writing to the short sale lender. The short sale lender can also reverse the short sale approval letter should they ever find out that you did not disclose the exchange of money. Please read the short sale approval letter as a Buyer and the Arms-Length Affidavit.
Happy House Hunting!!!