Reverse Mortgage Problems for Heirs: Deadlines, the 95% Rule, and Taxes

Inheriting a home with a reverse mortgage brings a set of problems most heirs don’t see coming: a loan balance that has quietly grown for years, federal deadlines that start running within weeks of the death, and a servicer that will move toward foreclosure if the estate stays silent. The good news is that heirs are not personally liable for the debt, and federal rules give families real options, including a steep discount when the loan is larger than the home is worth. The hard part is acting quickly enough to use them.

Nearly all of these loans are Home Equity Conversion Mortgages (HECMs), insured by the Federal Housing Administration and regulated by HUD. The lender holds a first lien, and the debt must be settled before heirs see any remaining equity.

What Starts the Clock

A HECM becomes due and payable when the last surviving borrower dies, sells the home, or stops using it as a primary residence. A move to a nursing home or assisted living facility that lasts more than 12 consecutive months counts as moving out, even if the borrower never intended to leave for good.¹ For heirs, the triggering event is almost always death. The full loan balance becomes due at that moment.

The Deadlines Heirs Actually Face

The timeline moves faster than most families expect. The servicer must notify HUD within 60 days of the loan becoming due and payable, and then has 30 days after that notification to send a formal Due and Payable notice to the estate and heirs.² That notice is the starting gun.

Once heirs receive it, they have 30 days to tell the servicer what they intend to do: pay the balance, sell the home, deed it back to the lender, or correct whatever triggered the acceleration.² That response doesn’t require the estate to have solved anything yet. It just opens a dialogue with the loss mitigation team and keeps the lender from racing to foreclosure.

Thirty days obviously isn’t enough time to sell a house or line up new financing. The CFPB confirms that the timeline can be extended up to six months to let heirs sell the home or secure a mortgage of their own to buy it.³ HUD has historically granted further extensions beyond six months when the estate can show active progress, such as a signed listing agreement or a pending mortgage application. In practice, servicers often allow up to 12 months total before initiating foreclosure, but extensions are not automatic. Each one requires a formal request and evidence of movement. Heirs who go quiet or miss extension deadlines hand the servicer grounds to begin foreclosure.

Heirs Are Not Personally on the Hook

This is the single most important point for any family in this situation. A HECM is a non-recourse loan. Federal law provides that the homeowner “shall not be liable for any difference” between the outstanding balance and what the lender recovers from the home or from FHA insurance.⁴ That protection extends to heirs. If the balance has grown to $350,000 but the home sells for $200,000, the servicer cannot pursue heirs for the $150,000 gap. FHA insurance absorbs it.

The protection also shields the rest of the estate. Savings, vehicles, investment accounts, and other property the deceased owned cannot be seized to cover a reverse mortgage shortfall. The lender’s only remedy is the home itself. Be cautious of anyone who contacts the family and suggests otherwise. Scammers and aggressive collectors sometimes imply heirs owe money personally. They don’t, and any such contact should be reported to the CFPB or HUD.

When the Home Is Worth More Than the Loan

Not every reverse mortgage ends up underwater. If the market value exceeds the balance, there’s real equity to capture. Heirs can sell the home, pay off the loan from the proceeds, and keep the difference.³ Heirs who want to keep the home pay off the full balance using their own funds or a new conventional mortgage. In that case they’re buying a property with built-in equity.

The 95% Rule When the Loan Is Larger Than the Home

When the balance exceeds the appraised value, heirs get a meaningful discount. Federal regulations let the estate satisfy the mortgage by selling the property for at least 95% of its current appraised value, with the lender accepting those net proceeds as full payment.² HUD has confirmed that the same 95% figure applies when heirs want to buy the inherited home.⁵

Say the loan balance has grown to $400,000 but the home appraises at $300,000. Heirs can sell for $285,000 (95% of $300,000), and the lender must treat that as full satisfaction of the $400,000 debt. FHA insurance covers the loss. Closing costs on the sale cannot exceed the greater of 11% of the sales price or a fixed dollar amount set by HUD.²

The same principle works for heirs who want to keep an underwater home. Because the loan is non-recourse, the lender can only recover the home’s value. To retain the property, heirs pay the full balance or 95% of the appraised value, whichever is less.³ The appraisal has to come from an FHA-approved appraiser, and the servicer will want proof of funds or a mortgage commitment before releasing the lien.

A Surviving Spouse Who Isn’t on the Loan

One of the most painful situations arises when only one spouse signed the HECM. If the borrowing spouse dies first, the surviving spouse can face immediate repayment demands. Federal rules now offer protection, but only if the surviving spouse qualifies as an Eligible Non-Borrowing Spouse. The requirements are strict:

Married to the borrower when the HECM originated and still married at the borrower’s death.
Disclosed to the lender at origination and specifically identified in the loan documents as an Eligible Non-Borrowing Spouse.
Occupying the home as a principal residence at origination and continuing to live there.

A spouse who meets these conditions qualifies for a Deferral Period that postpones the loan from becoming due as long as the spouse keeps living in the home and meeting the criteria.⁶ A spouse who was ineligible at origination cannot become eligible later.

Deferral isn’t a free ride. Within 90 days of the borrower’s death, the surviving spouse must establish legal ownership of the property or a legal right to remain in it for life. The spouse must also keep up property taxes, homeowners insurance, and maintenance.⁶ Falling behind on taxes or insurance ends the deferral and makes the full balance due.⁷ During deferral, the balance keeps growing and no new loan proceeds are paid out.

Tax Issues That Catch Heirs Off Guard

The tax picture around an inherited reverse mortgage has a few surprises, most of them in the heirs’ favor.

Stepped-Up Basis

When heirs inherit a home, the tax basis resets to the fair market value on the date of death rather than what the original owner paid.⁸ If the borrower bought the home for $100,000 decades ago and it’s worth $300,000 at death, the heirs’ basis is $300,000. A later sale at $305,000 produces $5,000 in taxable gain, not $205,000. The reverse mortgage balance has no effect on this.

Accrued Interest Is Not Deductible

Heirs sometimes assume they can claim a deduction for the years of interest that built up on a reverse mortgage. The IRS treats accrued HECM interest as home equity debt interest, which is generally not deductible.⁹ The large interest figure on the payoff statement is not a tax asset.

No Cancellation-of-Debt Income

When a non-recourse loan is settled for less than the full balance, the IRS treats the transaction as a sale or disposition of property rather than canceled debt. Heirs don’t get a surprise tax bill for the forgiven amount. Even if a 1099-C arrives, debts canceled as part of a bequest or inheritance are excluded from taxable income.¹⁰ Selling an underwater home for 95% of appraised value should not generate income tax on the forgiven portion.

The Four Resolution Paths

Under federal regulations, heirs have four options:²

Pay the balance (or 95% of appraised value if lower) and keep the home. The servicer releases the lien and heirs own the property outright.
Sell the property. Proceeds go to the loan, and any surplus goes to the heirs. The servicer typically wants regular updates on listing activity and offers.
Deed-in-lieu of foreclosure. Heirs voluntarily transfer the deed back to the lender, which cancels the debt and avoids a foreclosure proceeding. Heirs choosing this route need to disclose any existing tax liens or other encumbrances on the property.¹¹
Do nothing. The lender forecloses, the home goes to auction, and heirs lose all rights once the sale is recorded.

Whichever path the family chooses, the written response to the servicer should go out by certified mail with return receipt within the 30 days following the Due and Payable notice, identifying the property, loan number, and all legal heirs. A paper trail matters if there’s ever a dispute about whether the response was timely.

How Probate Complicates the Timeline

The HECM clock doesn’t pause while a property winds through probate. If the deceased borrower didn’t use a living trust or another non-probate transfer, the executor may not have legal authority to sell the home or negotiate with the servicer until the court appoints them. Probate takes months, and contested estates take much longer. Servicer deadlines keep running the entire time.

Servicers do respond to demonstrated progress. Filing the probate petition promptly, ordering an appraisal early, and sending the servicer copies of court filings as they’re made all build a record that supports extension requests. The worst move an estate can make is going quiet while waiting for the court. Proactive communication won’t guarantee more time, but silence almost guarantees the servicer will move toward foreclosure.¹²

1
Consumer Financial Protection Bureau. When Do I Have to Pay Back a Reverse Mortgage Loan
2
eCFR. 24 CFR 206.125 – Acquisition and Sale of the Property
3
Consumer Financial Protection Bureau. With a Reverse Mortgage Loan, Can My Heirs Keep or Sell My Home After I Die
4
Office of the Law Revision Counsel. 12 USC 1715z-20 – Insurance of Home Equity Conversion Mortgages for Elderly Homeowners
5
U.S. Department of Housing and Urban Development. Inheriting a Home Secured by an FHA-Insured HECM
6
eCFR. 24 CFR 206.55 – Deferral of Due and Payable Status for Eligible Non-Borrowing Spouse
7
Consumer Financial Protection Bureau. You Have a Reverse Mortgage – Know Your Rights and Responsibilities
8
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
9
Internal Revenue Service. Publication 936 (2025), Home Mortgage Interest Deduction
10
Internal Revenue Service. Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments
11
Consumer Financial Protection Bureau. What Is a Deed-in-Lieu of Foreclosure
12
U.S. Department of Housing and Urban Development. HUD FHA Reverse Mortgage for Seniors (HECM)