What impact does the Heirs' 95% Rule have on selling a HECM property?
Regulations specify a threshold where heirs can sell the home and keep the proceeds without repaying the full loan balance. Knowing how this rule interacts with the 10-year post-borrower-death window is crucial for estate administration.
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The Heirs' 95% Rule generally does not apply to federally insured HECM loans, as this non-recourse structure allows heirs to sell the property and keep 100% of proceeds exceeding the outstanding loan balance without repaying the full debt if the balance exceeds the sale price.
- Non-Recourse Protection: Under federal guidelines administered by the U.S. Department of Housing and Urban Development (HUD), HECM borrowers and their estates are liable only up to the value of the home at the time of sale, or 95% of its appraised value, whichever is less. This means heirs are not personally liable for any shortfall if the loan balance exceeds the home's worth.
- Sale Proceeds Retention: If the heirs sell the property, they are responsible for paying off the outstanding loan balance, including accrued interest and fees. Any equity remaining after this payment belongs to the heirs or the estate. For example, if a home sells for $400,000 and the HECM balance is $250,000, the heirs retain the $150,000 difference.
- Timing Considerations: Heirs typically have a grace period, often up to six months, after the last eligible borrower dies to sell the home. During this window, they must maintain the property in habitable condition and continue paying property taxes, insurance, and HOA fees to avoid defaulting on the loan's terms.
- Alternative to Selling: Heirs can also choose to keep the home by paying off the loan balance in a lump sum or refinancing. If they cannot afford the payoff, they may be able to transfer the property to the lender without further liability, known as a deed in lieu of foreclosure, provided it is accepted by the HECM servicer.
- Professional Advice: Because state laws and specific loan terms can influence estate administration, heirs should consult with an elder law attorney and a real estate agent experienced in reverse mortgages to optimize their options and ensure compliance with all HUD requirements.
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