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Understanding reverse mortgage short sales

When a reverse mortgage borrower passes away, the balance of the loan immediately becomes due for the heir or heirs of the property. In resolving this balance, heirs primarily have two options: sell the property, using the funds from the sale to repay the outstanding debt, or acquire a new mortgage loan to essentially repurchase the property. However, if the value of the home declines such that the reverse mortgage balance exceeds the projected sales price, heirs have a third option: foreclosure. While short sales carry many advantages to foreclosures in most situations, reverse mortgage heirs have no incentive to sell short the property and should instead foreclose.

Non-Recourse Loans

Unlike most standard mortgage programs, reverse mortgages are non-recourse loans, which basically mean that reverse mortgage borrowers and heirs cannot be responsible for any outstanding deficiency beyond the sales price of the home. As such, heirs who inherit an underwater reverse-mortgaged property have no obligation to sell the home, as there would be no benefit other than to avoid foreclosure.

Short Sale or Foreclosure?

In this case, short sale may seem like a legitimate course of action; however, reverse mortgage heirs cannot suffer the negative credit effects of a loan which they did not secure. If this were the case, many reverse mortgage borrowers would unfairly inherit significant credit problems as a result of the necessary short sales and foreclosures that would inevitably occur. Furthermore, short sales tend to have the same effect borrower credit as foreclosures, removing any incentive to do so. In other words, reverse mortgage heirs have no reason to undergo the hassle and expense of a short sale, as there will be nothing to gain. Rather, heirs who do not intend to retain ownership of the home can simply allow the lender to foreclose and can walk away from the property with no repercussions.

Reverse Mortgage Borrower Short Sales

Reverse mortgage borrowers do not always remain within the home until they pass away, sometimes needing or wanting to sell their home. Once a reverse mortgage borrower sells or moves from the property, the balance of the loan immediately become due. Under some circumstances, short sales may seem like an attractive option; if the home has gone underwater as the result of diminished home value, borrowers may want to perform a short sale in order repay the majority of the loan balance. However, as previously indicated short sales affect borrower credit nearly as much as foreclosures, making the option less viable. In addition, due to the cost and time required to perform a short sale, many borrowers may deem it more advantageous to simply foreclose. As a non-recourse loan, lenders cannot pursue any deficiency claims, and most reverse mortgage borrowers will not acquire more mortgage loans to justify performing a short sale.  Accordingly, reverse mortgage short sales are almost always unnecessary, and borrowers should consider foreclosure and other options prior to performing a short sale.

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