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Under HUD rules for federally insured HECM reverse mortgages, heirs can pay off the loan by paying the lesser of the full balance or 95% of the home's current appraised value. If the loan is larger than the home, FHA insurance absorbs the rest, and the estate and heirs owe nothing more.
I am Ed Drost, a Maryland State Certified Residential Appraiser and FHA appraiser. I have appraised homes since 1989, with more than 20 years of reverse mortgage (HECM) experience. This article is part of our series for heirs. Start with the cornerstone guide, What Happens to a Reverse Mortgage When the Borrower Dies?, or our free step-by-step guide for heirs.
What is the 95% rule?
The 95% rule is a HUD guideline for federally insured Home Equity Conversion Mortgages (HECMs). When the last borrower dies, the loan comes due. Heirs who want to keep or sell the home do not have to pay a balance that is larger than the home is worth. They can settle the loan for the lesser of two numbers:
- the full loan balance, or
- 95% of the home's appraised value.
The difference is covered by FHA mortgage insurance. Because a HECM is a non-recourse loan, the lender can only look to the house, never to the heirs' own money.
How does it work with real numbers?
| Appraised value | Loan balance | 95% of value | Heirs pay |
|---|---|---|---|
| $400,000 | $260,000 | $380,000 | $260,000 (balance is lower) |
| $300,000 | $380,000 | $285,000 | $285,000 (95% is lower) |
| $250,000 | $350,000 | $237,500 | $237,500 (95% is lower) |
In the first row the home has equity, so the 95% rule is not needed: heirs pay off $260,000 and the estate keeps the rest. In the second and third rows the loan is bigger than the home, so the 95% figure applies, and FHA insurance covers the gap.
Why does a $10,000 appraisal difference change your price by $9,500?
Because the 95% rule is built on the appraised value, every $1 of value is worth $0.95 to the heir. A $10,000 swing in the appraiser's final value moves the buyout price by $9,500 when the loan is larger than the home.
As an appraiser, I see how a single line in the sales comparison grid can create that swing. Appraisers adjust each comparable sale to match the home being valued. A few examples of adjustments that can be worth thousands of dollars each:
- Living area: a 200-square-foot difference at $50 per square foot is a $10,000 adjustment.
- Condition: a home with worn systems and deferred maintenance is not worth what an updated comparable sold for.
- Finished basement, garage or lot: credited fully, partly, or missed.
- Location: a comparable across a neighborhood or City/County line may sell in a different market.
(These figures are examples to show how the math works, not a statement about any particular home.) If the grid is built on the wrong facts or poor comparables, the final value, and your price, can be off by tens of thousands of dollars.
When does the 95% rule not help?
- The home has equity. If the balance is lower than 95% of value, you simply pay the balance.
- The loan is not a HECM. Private (proprietary) reverse mortgages follow their own contracts and may not offer this option.
- A sale is not at arm's length. Sales to relatives or insiders at a low price may not be accepted as payoff in full.
- The deadline passed. Heirs generally need to act within the response and extension period, so ask the servicer about current deadlines.
How do heirs use the rule to keep the home?
An heir can buy the home from the estate or refinance with a regular mortgage, paying the lesser of the balance or 95% of the appraised value. A conventional lender will underwrite the new loan like any other, and will usually order its own appraisal. Heirs also need legal authority over the home through the Register of Wills or a trust before they can close. If several heirs are involved, settle in writing who is buying out whom before applying. Start early, because lenders take weeks and servicer deadlines keep running.
How do heirs use the rule to sell the home?
The estate lists the home on the open market. If the home is worth more than the loan, the loan is paid at closing and the family keeps the extra. If the loan is larger than the home, the servicer will generally accept a sale to an unrelated buyer at 95% of the appraised value or better as payoff in full. Share the listing agreement and offers with the servicer as you go, because that documented progress also supports extension requests.
What should heirs do before accepting the appraisal?
Ask the servicer for a complete copy and read it. Check the square footage, bedroom and bath count, condition notes and the comparable sales. If something looks wrong, you can ask for a reconsideration of value. Our step-by-step checklist is here: How to Dispute an Inflated Reverse Mortgage Appraisal.
The big picture
The 95% rule is one part of the process. For deadlines, your four choices and what to do first, read the full guide: What Happens to a Reverse Mortgage When the Borrower Dies?
Common questions
What is the reverse mortgage 95% rule?
Under HUD rules for HECM loans, heirs can satisfy the debt by paying the lesser of the full loan balance or 95% of the home's appraised value. If the loan is larger than the home, FHA insurance absorbs the difference.
Can heirs buy back a reverse mortgage home for less than what is owed?
Yes, when the loan balance is larger than the home's value. Heirs can buy or refinance the home for 95% of the appraised value, and the remaining balance is covered by FHA insurance.
Who decides the appraised value for the 95% rule?
The servicer orders an FHA appraisal to set the value. Heirs can ask for a copy, review it for errors, and ask the servicer to reconsider the value with supporting evidence such as an independent appraisal.
Does the 95% rule apply if the heirs sell the house?
Generally yes. A sale to an unrelated buyer at 95% of the appraised value or higher is usually accepted by the servicer as payoff in full, with the servicer's approval.
Do heirs owe the difference if the loan is larger than the home?
No. A HECM is non-recourse, so heirs and the estate do not owe more than the home is worth. FHA insurance covers the shortfall.
Sources
- HUD: Home Equity Conversion Mortgage (HECM) program
- HUD: Find a housing counselor (or call 800-569-4287)
- Consumer Financial Protection Bureau
This article is general information, not legal, tax or financial advice. HUD rules and servicer procedures change and every loan is different. Confirm current requirements with your servicer, a HUD-approved housing counselor, a Maryland attorney and a CPA.
More articles
What Happens to a Reverse Mortgage When the Borrower Dies? A Guide for Heirs
The loan comes due, but heirs will not owe more than the home is worth. The 95% rule, the deadlines and the four choices, explained by an FHA appraiser.
How to Dispute a Reverse Mortgage Appraisal (ROV Checklist)
A step-by-step checklist for heirs: what to request, what counts as proof, and how to ask the servicer to reconsider the value.
Do Heirs Need Probate to Sell a Reverse Mortgage Home in Maryland?
When Maryland heirs need probate, how it fits the servicer's deadlines, and the title and HOA traps to avoid if you walk away.