I recently had the opportunity to present at our national conference alongside industry trainer, Jim McMinn. During this presentation, one talking point stood out as a misconception that needed addressed – what is necessary to satisfy a HECM loan when it matures?
The conventional wisdom is that a HECM payoff will be the lesser of the loan balance or 95% of the property’s appraised value. Unfortunately, this is only true under certain circumstances.
Consider an older borrower whose financial position has changed. Maybe it was a life insurance claim for a deceased spouse, inherited funds, or an investment that matured. Whatever the reason, if that borrower wishes to pay off a HECM loan balance, they owe the full loan balance.
There are cases, however, where borrowers or their heirs can satisfy the HECM for 95% of the appraised value. The availability of this option may depend on whether the loan is “due and payable,” who is doing the satisfying, and the definition of the word “sale.”
WITH A TRADITIONAL SALE OF THE PROPERTY
The borrower or their estate may sell the property at any time for the lesser of the following two values:
- The debt due under the mortgage, or
- The appraised value at the time of the sale. *
Therefore, one CANNOT arbitrarily sell the home for 95% of the appraised value and satisfy a HECM loan balance that exceeds this amount.
WHEN THE LOAN IS DUE AND PAYABLE
If the mortgage is due and payable at the time the contract for sale is executed, the threshold is reduced. This is generally the case when the last borrower has died. In this event, the borrower may sell the property for the lesser of the loan balance or 95% of the current appraised value. **
In essence, the “95% SALE” option becomes available when the HECM loan becomes due and payable.
IF THE HEIRS WANT TO KEEP THE PROPERTY
This can get tricky. The non-recourse feature offered with reverse mortgages requires a sale of the home. Fortunately, HUD interprets the word “sale” to include any post-death conveyance of the mortgage property to the borrower’s estate or heirs. ***
Therefore, if the heirs want to keep the home AND want a discounted payoff of the HECM loan balance, they will need to show a transfer of title that occurs upon the death of the last borrower, or after. This could be in the form of a trust, a life estate, or simply probating the homeowner’s will.
The danger is that heirs who are already on title at the time of the last borrower’s death may not qualify for the reduced payoff.
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- *Reference – HUD 4330 Ch13-29A
- **Reference – HUD 4330 Ch13-29B
- ***Reference – FHA INFO #13-36