HUD guidelines and reverse mortgages are tricky but not impossible to understand. Reverse mortgages can be beneficial for seniors with a lot of equity in their house. Find out more about reverse mortgages and how they can affect buyers and sellers.
Reverse mortgages can be extremely helpful for people over 62 who are house rich and cash poor. But reverse mortgages come with their own set of strict guidelines that, if are not followed closely, can force a house into foreclosure.
Some reverse mortgage foreclosures are excellent deals which is why investors tend to hunt for them. Reverse mortgage properties can also cause headaches for heirs who must figure out whether they can keep or have to sell the property to keep it out of foreclosure.
If you’re trying to sell a reverse mortgage property, make sure you connect with an expert realtor who has experience in reverse mortgage properties and knows how to get top dollar for them.
Let’s take a look at an overview of reverse mortgages, reverse mortgage foreclosures, and many of the more important issues that come up concerning them..
What are HUD Guidelines 24 CFR 206.125?
HUD Guidelines 24 CFR 206.125 are rules about how to buy or sell a home through a reverse mortgage foreclosure. A property that is a "24 CFR 206.125" is a lender-owned REO, like other foreclosures, but has very strict procedures governing how the real estate transaction must be carried out.
What are the specific rules of these guidelines?
The rules of properties being sold which are subject to the Department of Housing and Urban Development (HUD) Guidelines 24 CFR 206.125 are as follows:
- An heir can purchase the property at 95% of the listed price
- The property cannot be sold below the appraised value
- No mediation
- No electronic signatures
- No repairs — the house is sold "as is" at the time of closing
- Seller can’t pay buyer closing costs
- Buyer pays homeowners association document and transfer fee
- No utilities are on, but the buyer can pay to have them on for inspection
- No agent transaction fees allowed even if the buyer is paying
- Seller will pay seller’s closing costs and provide buyer with PDQ Hazard Report
- Any realty transfer taxes due will be the sole responsibility of the buyer
- Seller will bring taxes and homeowner association fees current through closing
- 10% deposit is required on all cash offers
- $1,000 minimum deposit required on financed offers
- 60 day minimum escrow period or longer if title is not clear
- Homepath financing is not available on these properties
- Buyer must use legal name reflected on driver’s license
- If buyer is an LLC, buyer must provide stamped articles of incorporation pages
- Offers that do not meet these guidelines will be rejected
If you’re making an offer on a reverse mortgage foreclosure, you should always work very closely with a top, local real estate agent who is experienced in reverse mortgage foreclosures to make sure you do everything correctly. You don’t want to get stuck with an overpriced lemon or risk having your offer rejected on a great buy because you didn’t follow the procedures correctly.
What is a reverse mortgage?
A reverse mortgage lets you use the equity of your home as a source of income while allowing you to stay in the home. Seniors can benefit from a reverse mortgage if they have equity in their home and need to use the equity for living expenses to supplement their retirement income, or cover large expenses such as medical bills.
The money pulled from the value of the home can be paid to the owner in one lump sum, as monthly payments, or as a line of credit — depending upon the type of reverse mortgage and the lender.
The amount borrowed is considered a tax-free source of income. The amount of the reverse mortgage doesn’t have to be repaid as long as the homeowner lives in the home and doesn’t violate any of the terms and conditions of the reverse mortgage.
Over time, the home equity decreases and the loan balance increases because fees and interest charges apply to the loan amount. This is why inheriting a reverse mortgage property can sometimes be a struggle. It’s possible that the reverse mortgage may be upside down, or more than the property is worth.
Does Fannie Mae do reverse mortgages?
Fannie Mae is well known for offering reverse mortgages. Two of Fannie Mae’s more popular reverse mortgages are the Fannie Mae Home Keeper and the HUD-insured Home Equity Conversion Mortgage (HECM). Seniors can pull out cash from the equity of their home as long as they continue to live in the home, continue paying their property taxes and insurance, and keep up the property maintenance and repairs.
What is a home equity conversion mortgage (HECM)?
A Home Equity Conversion Mortgage (HECM) is a type of reverse mortgage that was created by the U.S. Department of Housing and Urban Development (HUD) and is insured by the Federal Housing Administration (FHA). An HECM is sort of like a home equity loan that doesn’t need to be paid back right away.
HECM was designed to give older homeowners a way to turn the equity of their homes into cash. Homeowners can get cash in a lump sum or in regular payments to supplement their monthly income. The loan doesn’t have to be paid back until the homeowner dies or the home is sold unless the homeowner defaults by moving out of the home, not paying taxes and insurance, or not taking care of the home.
HECM is insured by the FHA and require you to pay mortgage insurance premiums. A homeowner or their estate will only owe the lesser amount of the loan balance or 95% of the value of the property. The FHA insurance covers any further financial obligation to the lender.
Who can qualify for a reverse mortgage?
To qualify for a reverse mortgage you have to be at least 62 years old. For married couples or joint owners, the youngest borrower must be at least 62. The home must be your primary residence. You’re not allowed to take out a reverse mortgage on a house that is a rental or investment property. Also, you must have sufficient equity to qualify for a reverse mortgage.
Each lender has a different approval process based upon factors such as your age, the loan type, the home’s value, and the equity in the home. You must be able to afford to pay property taxes, insurance, and any homeowners association fees. To qualify for the HECM, you can’t owe any money to the federal government, such as unpaid income taxes.
When do reverse mortgage foreclosures happen?
Before a reverse mortgage foreclosure can occur, a reverse mortgage must become due and payable. Reverse mortgages can become due and payable if the homeowner dies, sells or moves out of their home, fails to pay the property taxes and/or insurance, or fails to properly maintain the home.
The lender will issue a due and payable notice which demands payment of the full amount of the reverse mortgage. The due and payable notice will also list the reasons it was triggered and give timelines that the borrower must follow to correct the problem.
If the borrower can correct the problem that triggered the demand for repayment — catch up with the taxes and insurance, move back in, or repair the property — the loan can continue as it was. If the borrower can’t correct the problem, the foreclosure process can begin as soon as one to three months later.
If the foreclosure is triggered due to the property being sold or the borrower’s death, the borrower or heirs have to pay off the debt to avoid the foreclosure. Lenders may give borrowers or their estate time extensions to repay the reverse mortgage as long as the property is being marketed for sale or the estate is seeking financing to purchase the property.
What happens after the foreclosure?
If a lender forecloses on a property, they will list it with a real estate agent and try to sell it. Reverse mortgage foreclosure property sales come with their own set of rules which are governed by HUD Guidelines 24 CFR 206.125.
The most important rule, at least for buyers, is that the property can’t sell for less than the appraised value, which is the list price. There is no negotiation on price allowed. However, lenders have the property reappraised every 90 days and adjust the list price.
The list price of a reverse mortgage foreclosure that has been on the market for a long time will continue to go down. If you work with an experienced buyer agent who knows how to follow the property and catch the price change you’ll have a better chance of grabbing it before an investor beats you to it.
Remember, the home is sold "as is." The seller won’t do any repairs, connect utilities, or pay closing costs. If a buyer wants to have an inspection on the property with utilities, the buyer, or the buyer’s agent, can turn them on but it’ll be at their own expense.
You can make an offer on contingency of the inspection, which is required if you need to qualify for a mortgage to buy it. But don’t forget that the seller won’t do any repairs nor negotiate repair costs.
If you’re trying to buy a reverse mortgage foreclosure and are waiting for funding, you need the counsel of an expert realtor to help determine whether the property meets the standards for whatever loan program you’re trying to get funding through.
What is the best way to handle a reverse mortgage situation on your home?
If you’ve received a due and payable letter for the current loan balance of the reverse mortgage on a house owned by you or a relative, don’t ignore it. You only have 30 days to respond before foreclosure proceedings can begin.
A due and payable letter should outline a timeline for a response and layout options to either pay it back or correct the condition that triggered it. If the due and payable letter was triggered by non-payment of taxes and insurance, it may be easy to correct by catching up with these payments.
However, if the letter was triggered because the owner died or had to move to a facility, the borrower’s estate or heirs will need to find a way to pay off the debt to keep the house out of foreclosure. Owners or their heirs can pay off the debt or 95% of the appraised value of the house, whatever is less. They can sign a deed in lieu of foreclosure which basically just gives the property to the lender. Other options include selling the property or doing nothing and allowing the foreclosure.
Reverse mortgage situations on a house can be tricky. If you’re facing a reverse mortgage foreclosure, try to work with the lender to solve the problem. If you decide to sell, make sure that you engage the services of an expert seller agent with reverse mortgage experience who can communicate with the lender correctly and help you get the most for the property.
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Top FAQs About Reverse Mortgages
Is there interest on a reverse mortgage?
There is interest on a reverse mortgage. Interest rates charged on the funds received from a reverse mortgage are not paid monthly like a traditional mortgage. Instead, they are deferred until the loan is due and payable.
The interest is charged on the balance of the loan and then added to the loan over the life of the loan. This means that the older the reverse mortgage on the house is, the more interest gets added to the loan. As the balance of the loan gets bigger, so does the amount of interest added to the balance.
Can I buy a house that has a reverse mortgage?
You can buy a house that has a reverse mortgage like you can any property. If a house is being sold with a reverse mortgage on it, the owner may just want to move, but chances are they have died or are no longer able to live in the house.
This means that you may be dealing with the heirs or relatives of the owner who are selling the house to settle an estate that is either in probate or part of a trust. Get a good realtor experienced with these types of situations because they have varying degrees of complexity.
What is the downside of a reverse mortgage?
The downside of a reverse mortgage is that it forces you to borrow against the equity in your home which could be your only source of wealth. If you want to leave your home to heirs, they may end up losing the property if they don’t have the funds to pay off the loan.
Also, you have to maintain repairs to the house and pay ongoing obligations such as property taxes, homeowners insurance, and sometimes homeowners association dues to keep the loan.
Reverse mortgage payments you receive may not be enough to cover the ongoing costs — especially with inflation slowly weakening your purchasing power over time. If you don’t have another source of income to tap into for big expenses such as medical or home-maintenance issues, you may not be able to keep up with the expenses of a reverse mortgage and could lose your home.
Don’t forget that to qualify for a reverse mortgage, you must live in the home as your primary residence. If you take out a reverse mortgage to pay for medical bills for health problems, keep in mind that the house can be foreclosed on if those very health problems cause you to have to move to a care facility.
What are the closing costs on a reverse mortgage?
Closing costs on a reverse mortgage vary by lender, the area in which the borrower lives, the type of payout the borrower selects, and other factors. Closing costs commonly include an origination fee that compensates the lender for processing the loan, mortgage insurance, lender’s title insurance, title search fees, recording fees, signing fees, escrow fees, flood certification fees, credit report fees, and more. The benefit of this type of loan, however, is that you can roll the closing costs into the loan itself to lessen up-front charges.
