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The federally insured reverse mortgage known as a Home Equity Conversion Mortgage (HECM) is a non-recourse loan. This simple but powerful protection ensures that neither the borrower nor the borrower’s estate will owe more than the value of the home at the time it is sold. In practical terms, the borrower may sell the property at any time for the lesser of the loan balance or the appraised value, with no deficiency owed to the lender.
When the HECM loan becomes Due and Payable, this safeguard continues. But now, the home may be sold for the lesser of the loan balance or 95% of the appraised value, again with no deficiency owed.
Fortunately for heirs, HUD clarified the meaning of the word “sell.” HUD now interprets it to include “any post-death transfer of title.” This means that if the home passes through a Trust, Life Estate, Will, or any other mechanism that transfers ownership after the borrower’s death, the heirs should still qualify for the reduced payoff if they want to retain the family home.
WARNING: Do not encourage adding an heir to title while the borrower is still alive.
HUD has explained in a 2013 FAQ that the 95% option requires a “post-death conveyance of the property.” If an heir is added to title before the death of the last borrower, there is no “sell” when the borrower passes away. In that scenario, the heirs would be required to pay the full loan balance if they wish to keep the home.
The non-recourse feature remains one of the strongest protections offered to HECM borrowers. However, we need to remember that the 95% option only applies to HECMs where the home is sold (or title is transferred) after the loan becomes Due and Payable.
Sources:
- 24 CFR 206.125(a)(2)(ii)
- HUD 4000.1 III.B.2.b.