What heirs owe on a reverse mortgage
The four ways out for an estate when the last borrower dies, with the payoff figures, the 30-day notice and who pays for the appraisal.
Amount that settles the loan
$285,000
The balance exceeds 95 % of the value: FHA insurance covers the $55,000 gap.
| Loan balance | $340,000 |
| 95 % of the appraised value | $285,000 |
| Equity left to heirs if sold at value | $15,000 |
Heirs owe nothing beyond the home: the loan is non-recourse.
Worked out by Radif Partners · How we calculate · factors read on hud.gov · not a loan offer
When the last borrower dies and no eligible spouse remains, a HECM becomes due, and the heirs never owe more than the home: they can keep it by paying the lesser of the loan balance and 95 % of its appraised value. On a home appraised at $300,000, a balance of $340,000 is settled with $285,000, and FHA insurance absorbs the $55,000 difference; a balance of $240,000 is repaid in full and the $60,000 above it stays with the estate. Under 24 CFR 206.125, the lender sends a due and payable notice and gives 30 days from that notice to pay the balance, sell the home, or sign a deed in lieu of foreclosure. If the loan is due, the appraisal is at the lender's expense, reimbursed from a sale. The borrower has no personal liability, so no deficiency judgment can follow a foreclosure.
The payoff on a home appraised at $300,000
Two numbers decide what an estate faces: the loan balance on the servicer's payoff statement and the appraised value of the home. Keeping the home costs the lesser of the balance and 95 % of the value. Selling it on the open market sends the net proceeds to the lender, and anything above the balance belongs to the estate. The table holds the value at $300,000, where the 95 % line sits at $285,000.
| Loan balance | Paid to keep the home | Left to the estate after a sale at value | Absorbed by FHA insurance |
|---|---|---|---|
| $150,000 | $150,000 | $150,000 | $0 |
| $240,000 | $240,000 | $60,000 | $0 |
| $285,000 | $285,000 | $15,000 | $0 |
| $300,000 | $285,000 | $0 | $15,000 |
| $340,000 | $285,000 | $0 | $55,000 |
| $420,000 | $285,000 | $0 | $135,000 |
Above $285,000 the payoff stops rising. A balance of $340,000 or $420,000 costs the same $285,000 to keep the home, because the lender files a claim with FHA for the rest. That is the purpose of the mortgage insurance the borrower paid: 2 % at closing and 0.5 % a year on the balance.
Your balance against the appraisal
Amount that settles the loan
$285,000
| Loan balance | $340,000 |
| 95 % of the appraised value | $285,000 |
| Equity left to heirs if sold at value | $15,000 |
How large the balance gets before it is inherited
A HECM has no monthly payment, so the balance only grows. Take a borrower aged 76 with a $265,000 home who drew everything allowed in the first year, at an initial note rate of 5.99 % plus 0.5 % of mortgage insurance, held constant:
| Years after closing | Age reached | Loan balance |
|---|---|---|
| 5 | 81 | $92,738 |
| 10 | 86 | $128,176 |
| 15 | 91 | $177,156 |
| 20 | 96 | $244,853 |
Whether heirs inherit equity depends on the race between that column and the home's value, which nobody can project. If the house is still worth $265,000 after 20 years, keeping it costs $244,853. The loan balance page shows the same growth for other amounts.
From the death to the 30-day notice
A HECM becomes due and payable when a borrower dies and the home is no longer the principal residence of at least one surviving borrower, unless an eligible non-borrowing spouse is entitled to a deferral. The steps that follow are written in 24 CFR 206.125:
- the lender notifies HUD within 60 days of the loan becoming due;
- within 30 days of that notice, or of HUD's approval when one is needed, it notifies the estate and the heirs that the loan is due;
- the estate then has 30 days from the date of that notice to choose a course.
Those 30 days are a window to answer, not a deadline to have sold the house. The regulation gives the lender six months from the due date to start a foreclosure, more when HUD approves it or when state or bankruptcy law stops it from starting. The regulation itself gives no longer delay to heirs; anything more is up to HUD and the servicer.
The four ways to settle
Pay the balance
The estate or an heir pays the balance in full, with accrued interest, mortgage insurance and any advances the lender made. When the balance is under 95 % of the value, this is the price of keeping the home, whatever money the heirs use to pay it.
Sell the home
Once the loan is due, the home can be sold for an amount HUD sets by notice, which cannot exceed 95 % of the appraised value, and the net proceeds go to the lender. Closing costs of that sale may not exceed the greater of 11 % of the price or a fixed amount set by HUD. On a sale at $300,000, 11 % is $33,000. A sale includes a transfer of title by operation of law, so an heir who takes title and pays the 95 % amount counts. The lender releases the mortgage provided there are no other junior liens and all net proceeds are paid to it.
Give a deed in lieu of foreclosure
An estate with nothing to gain can hand the deed to the lender. The lender must accept it if it is filed for recording within 9 months of the due date and title is good and marketable. HUD may also pay a cash-for-keys incentive when the deed is given within 6 months; the amount is set by HUD, not in the regulation.
Let the lender foreclose
If nothing is done, the lender forecloses and must bid at least the lesser of the debt with expenses and the current appraised value. The appraisal must be dated no more than 30 days before the sale. Because the debt is non-recourse, the estate owes nothing after it.
The appraisal behind the 95 % figure
The value that sets the payoff comes from an appraiser on the FHA roster, ordered by the lender within 30 days of a request tied to a possible sale. If the loan is due and payable, the lender pays for it and may recover the cost from the sale proceeds; if not, the party asking pays. Before a loan is due, a borrower or a representative can also sell for at least the lesser of the balance and the appraised value.
One tax point travels with the payoff. IRS Publication 936 treats the money a borrower received as loan advances, not income, and says interest accrued on a reverse mortgage is generally considered interest on home equity debt and is not deductible. The large interest figure on the final payoff statement is therefore not, as a rule, a deduction waiting for the estate.