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What happens to a reverse mortgage when the borrower dies?
When the last borrower on a reverse mortgage dies, the loan becomes due and payable. The servicer sends a notice, and heirs generally get about 6 months (up to about 12 with extensions) to sell the home, keep it, or hand it back. On a federally insured HECM, heirs never owe more than the home is worth and can settle the loan for the lesser of the balance or 95% of the appraised value.
- You will not lose the house overnight. The clock starts with the servicer's notice.
- A HECM is non-recourse: heirs are not personally liable for a shortfall.
- The appraised value sets your price under the 95% rule, so it pays to check it.
- You have four choices: sell, keep, deed-in-lieu, or let the lender foreclose.
- Act early: open the estate, call the servicer, protect the house, and ask for extensions in writing.
I am Ed Drost, a Maryland State Certified Residential Appraiser and FHA appraiser. I have appraised homes since 1989, and for more than 20 years I have worked with reverse mortgage (HECM) properties. Families usually call me in the same state of mind: grieving, confused by a letter from a loan company, and afraid they are about to lose a parent's home or take on a debt they cannot pay. The honest answer is usually far better than they expect, so I built a free step-by-step guide and wrote this article to explain the basics.
Will heirs owe money out of their own pocket?
No, not beyond the home itself. Most reverse mortgages are Home Equity Conversion Mortgages (HECMs), which are insured by the Federal Housing Administration (FHA). A HECM is a non-recourse loan, which means the lender can only collect from the house. It cannot collect from the heirs' savings, wages or other property.
If the balance has grown larger than the home is worth, which can happen because interest and mortgage insurance are added to the balance every month, FHA insurance covers the shortfall. Heirs were not the borrowers, so a foreclosure on the loan generally does not hit their own credit.
One caution: a private (proprietary) reverse mortgage is not a HECM and follows its own contract. If you are not sure which kind your parent had, look at the loan papers or ask the servicer.
What is the 95% rule?
The 95% rule lets heirs pay off a HECM for the lesser of the full loan balance or 95% of the home's appraised value. If the loan is larger than the home, heirs pay only 95% of the appraisal, and FHA insurance covers the rest.
| Scenario | Appraised value | Loan balance | Heirs pay |
|---|---|---|---|
| Home has equity | $400,000 | $260,000 | $260,000 (estate keeps about $140,000) |
| Loan is larger than the home | $300,000 | $380,000 | $285,000 (95% of $300,000) |
| Far underwater, walk away | $250,000 | $350,000 | $0 (deed-in-lieu or foreclosure) |
Why does the appraisal matter so much?
Because under the 95% rule, the appraised value sets the price. A few thousand dollars of difference in value changes what an heir pays, or whether a short sale is approved.
The servicer orders its own FHA appraisal, performed by an appraiser on the FHA roster who follows HUD's appraisal requirements. As an FHA appraiser, I know what those reports must contain, and I also know where they go wrong. The problems I see most often are:
- Wrong square footage or room counts that inflate or shrink the value.
- Comparable sales that do not fit, such as a different neighborhood, style, or condition.
- Condition issues that are missed, or repairs that are overstated.
Heirs can ask the servicer for a copy of the appraisal and read it closely. If something looks wrong, a second opinion from a local certified appraiser, with photos and better comparable sales, can support a request for a reconsideration of value. The servicer makes the final call, so put the request and the answer in writing.
A separate appraisal can also document the home's date-of-death value. Inherited property generally gets a stepped-up tax basis equal to its fair market value on the day the owner died (IRS Section 1014), which can greatly reduce capital gains if the heirs sell. Read more in our articles on the date-of-death appraisal and the IRS stepped-up basis.
How much time do heirs have?
Heirs generally have about 6 months from the due-and-payable notice to resolve the loan. HUD allows extensions in 90-day steps, commonly up to about 12 months in total, when heirs can document real progress. Typical proof includes a probate filing, a signed listing agreement, a sales contract, or a loan application. HUD can sometimes allow more time in special cases, and rules and servicer procedures change, so confirm the current deadlines with the servicer and request each extension in writing before the deadline.
Interest keeps adding to the balance during this time. Heirs must also keep the home insured, secured and maintained. A surviving spouse who was not on the loan may be able to stay in the home if they qualify as an Eligible Non-Borrowing Spouse, so raise that with the servicer right away.
What are the four choices?
- Sell the home. The loan is paid at closing and any extra goes to the estate. If the loan is larger than the home, the servicer will usually accept a sale at 95% of the appraised value or better.
- Keep the home. Buy it from the estate or refinance with a regular mortgage, paying the lesser of the balance or 95% of appraised value.
- Deed-in-lieu of foreclosure. Sign the home over to the lender and end the debt without a sale.
- Let the lender foreclose. Because the loan is non-recourse, heirs do not owe the difference, though they give up any equity.
What mistakes should heirs avoid?
- Ignoring the servicer's letters, which can cost heirs extension time.
- Paying the full balance when the 95% rule would let them pay less.
- Listing the house before getting legal authority to act for the estate through the Register of Wills.
- Letting insurance lapse on a vacant home.
- Taking the first cash offer without comparing it to the appraised value.
- Deeding an underwater house into their own name before walking away, which can make them responsible for HOA dues and code fines.
- HUD: Home Equity Conversion Mortgage (HECM) program
- HUD: Find a housing counselor (or call 800-569-4287)
- Consumer Financial Protection Bureau (reverse mortgage resources and complaint tools)
- IRS Publication 551: Basis of Assets (inherited property and stepped-up basis)
Where should heirs start?
Start with our free plain-English guide: A Parent Passed Away With a Reverse Mortgage: Now What? It walks through the first 30 days, the 95% rule with worked examples, the four choices, the questions to ask the servicer, and who can help. If you want a second opinion on the servicer's value, or a date-of-death appraisal, call me at 443-904-5229.
Go deeper: four specialized guides
Common questions
What happens to a reverse mortgage when the borrower dies?
The loan becomes due and payable. The servicer sends a notice, usually within about 30 days of learning of the death. Heirs then generally have about 6 months to sell the home, keep it by paying off the loan, or hand it back to the lender, with extensions up to about 12 months when they show progress.
Do heirs have to pay back a reverse mortgage with their own money?
No. A federally insured HECM reverse mortgage is non-recourse, so heirs and the estate can never owe more than the home is worth. If the loan balance is larger than the home's value, FHA insurance absorbs the difference.
What is the 95% rule for reverse mortgages?
Under HUD rules, heirs can pay off a HECM by paying the lesser of the full loan balance or 95% of the home's appraised value. That applies whether the heirs keep the home or sell it.
Can heirs walk away from a reverse mortgage?
Yes. Heirs can sign a deed-in-lieu of foreclosure or let the lender foreclose. Because the loan is non-recourse, there is no deficiency judgment against the heirs.
Who pays for the appraisal after a reverse mortgage borrower dies?
The servicer orders and pays for its own FHA appraisal to set the home's value for HUD purposes. Heirs may also hire an independent appraiser at their own cost, to check the servicer's value or to document the date-of-death value for tax purposes.
How long do heirs have to sell the house?
Heirs generally start with about 6 months from the due-and-payable notice and can request two 90-day extensions, for roughly 12 months in total, by showing documented progress such as a listing agreement, a probate filing or a loan application.
Sources
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 and a qualified attorney.
More articles
Appraisal vs. CMA: Can You Use a Real Estate Agent's Market Analysis for Probate?
What a CMA is, how it differs from a certified appraisal, and why heirs and executors usually need the appraisal for estate and tax purposes.
How Does the IRS Stepped-Up Basis Work for Inherited Real Estate?
How the IRS resets an inherited home's cost basis to its date-of-death value, with a worked example, what doesn't qualify, and why heirs need an appraisal.
What Is a Date of Death Appraisal in Maryland and Why Is It Required?
A certified retrospective valuation as of the day the owner passed. Why heirs and executors need one, with a worked stepped-up basis example.