When a parent with a HECM (Home Equity Conversion Mortgage) passes away, heirs often assume that if the loan balance is larger than the home is worth, the house is simply lost. That is not how FHA-insured reverse mortgages work. Under HUD rules, heirs who want to keep the home can purchase it for 95% of the current appraised value — even when the loan balance is far higher.
What the 95% rule actually says
A HECM is a non-recourse loan. Neither the borrower nor the estate can ever owe more than the home is worth at the time the loan is repaid. FHA mortgage insurance covers the shortfall for the lender. That protection creates two paths for heirs:
- Loan balance is less than the home's value: heirs pay off the balance (refinance or cash) and keep the remaining equity, or sell and keep the difference.
- Loan balance is more than the home's value: heirs may buy the home by paying 95% of the current appraised value, not the loan balance. FHA insurance absorbs the rest.
Example: mom's HECM balance is $480,000 and the home appraises at $400,000. Heirs can purchase the home for $380,000 (95% of $400,000). The $100,000 gap is covered by FHA insurance, not by the family.
The heirs' four options after a HECM borrower passes
- Buy the home — pay the lesser of the loan balance or 95% of appraised value.
- Refinance into a traditional mortgage — same payoff math applies.
- Sell the home — pay off the loan from proceeds and keep any surplus. If it sells for less than the balance, the shortfall is not the family's debt.
- Deed in lieu of foreclosure — sign the home over to the lender and walk away with no deficiency owed.
The timeline: what happens and when
- Day 1–30: notify the servicer of the borrower's passing in writing. Ask for the payoff statement and the "Due and Payable" notice.
- Within 30 days: the servicer sends a Due and Payable notice and asks heirs to state their intent.
- 6 months: the standard period to sell or pay off the loan.
- Two 3-month extensions may be requested from HUD (up to 12 months total) if heirs are actively marketing the home or arranging financing — extensions require documented progress.
How the appraisal drives everything
The 95% figure is based on a current FHA-compliant appraisal ordered by the servicer, not on the tax-assessed value or an online estimate. Heirs should:
- Request a copy of the appraisal in writing.
- Review it for errors in square footage, condition, or comparable sales.
- Dispute an inflated appraisal promptly — a high appraisal raises the 95% purchase price.
Common mistakes heirs make
- Waiting to contact the servicer. Silence starts the foreclosure clock; communication preserves options.
- Assuming the loan balance is the price. When the home is underwater, 95% of appraised value is the ceiling.
- Missing the extension deadlines. Extensions are not automatic; they must be requested with evidence.
- Believing the estate owes the shortfall. Non-recourse means it does not.
Does the 95% rule apply to every reverse mortgage?
The 95% purchase option is an FHA/HUD rule for HECM loans. Proprietary or "jumbo" reverse mortgages are not FHA-insured; they are typically non-recourse by contract, but the specific 95% purchase provision may not exist. Read the note, or ask us to review it with you.
Frequently asked questions
Can heirs be forced to pay the difference?
No. A HECM is non-recourse. Neither heirs nor the estate are personally liable for a balance above the home's value.
Do heirs need to qualify for a loan to use the 95% rule?
Only if they are financing the purchase. Paying cash requires no qualification; a new mortgage follows normal underwriting.
Is the 95% purchase treated as a sale?
Yes — it is handled as an arm's-length payoff at 95% of appraised value, and title transfers to the heir.
What if multiple heirs disagree?
The estate's executor typically directs the decision. One heir can often buy out the others and use the 95% option to take title.
Planning ahead
Families who understand these rules before a loan is taken out make better decisions. If you are weighing a reverse mortgage for a parent or for yourself, run the numbers first with our reverse mortgage calculator, review the full cost breakdown, and understand the required HUD counseling step. If you are comparing options, our reverse mortgage vs. HELOC guide lays out the trade-offs.
Heirs dealing with an existing HECM in California can contact our team for help reading a payoff statement or appraisal.
This article is for educational purposes and is not legal or tax advice. Consult a qualified attorney or tax professional about your specific situation.
