How can a borrower with a HUD reverse Mortgage HECM/Home Equity Conversion Mortgage apply for a short sale?

Obtaining approval for a HUD reverse mortgage (Home Equity Conversion Mortgage, or HECM) short sale involves a detailed process because the property is secured by a Federal Housing Administration (FHA)-insured reverse mortgage. Below is a step-by-step breakdown of the process:

1. Determine Eligibility for a Short Sale

• The homeowner must be in default or facing imminent default (e.g., unable to pay property taxes, insurance, or maintenance).

• The property must be the primary residence (HECM rules require borrowers to live in the home).

• The homeowner must demonstrate a legitimate financial hardship (e.g., medical issues, death of a spouse, forced relocation).

2. Contact the HECM Servicer

• The loan servicer (the company handling the reverse mortgage) must be notified of the intent to pursue a short sale.

• The servicer will provide guidance on their specific requirements.

3. Obtain a HUD-Approved Appraisal

• HUD requires a current appraisal to determine the property’s as-is market value.

• The appraisal must be conducted by a HUD-approved appraiser.

4. List the Property with a Real Estate Agent

• The home must be listed with a licensed real estate agent at fair market value (FMV).

• The listing price should align with the appraisal and local market conditions.

5. Receive and Evaluate Purchase Offers

• Any offers received must be submitted to the HECM servicer for review.

• The servicer will assess whether the offer is reasonable and if proceeds will cover (or come close to) the loan balance.

6. Submit a Short Sale Package to HUD

The homeowner (or their representative) must submit a complete short sale package, including:

• Hardship letter (explaining why the short sale is necessary).

• Financial documents (bank statements, tax returns, proof of income/expenses).

• Purchase offer from the buyer.

• HUD appraisal.

• Listing agreement (showing the property was marketed properly).

• Estimated HUD-1 Settlement Statement (showing costs and net proceeds).

• Other documents as required by the servicer.

7. HUD/Servicer Review & Approval

• The HECM servicer reviews the package and may negotiate with the buyer.

• If the servicer approves, they will issue a short sale approval letter with conditions (e.g., minimum net proceeds).

• HUD (FHA) must also approve the short sale if the servicer is seeking a claim on the mortgage insurance.

8. Close the Short Sale

• Once approved, the transaction proceeds like a normal sale.

• The title company or closing agent ensures all HUD/servicer conditions are met.

• The servicer releases the lien, and the property transfers to the buyer.

9. Post-Sale Obligations

• The HECM loan is extinguished, and the borrower (or estate) has no further liability (since HECM is a non-recourse loan).

• If the sale proceeds are less than the loan balance, HUD’s mortgage insurance covers the difference.

Key Considerations:

• No Deficiency Judgments: HECM loans are non-recourse, meaning the borrower (or heirs) won’t owe the remaining balance.

• Estate Implications: If the borrower has passed away, the heirs must work with the servicer to facilitate the short sale.

• Tax Implications: Forgiven debt may have tax consequences (consult a tax advisor).

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