Understanding Non-Recourse Loans
The 95% rule exists because HECMs are non-recourse loans. In a non-recourse transaction, the home itself is the only collateral used to repay the debt.
| Feature | Non-Recourse Reverse Mortgage | Standard Recourse Loan |
|---|---|---|
| Primary Collateral | The home only | The home + personal
assets |
| Max Borrower Liability | Capped at the home’s value | Full loan amount |
| Heir Personal Debt Risk | None; zero personal liability | May face estate claims |
| Deficiency Collection | Covered by FHA Insurance | Covered by FHA Insurance |
Because of the non-recourse clause, the lender cannot pursue the borrower’s estate, cash, investments, vehicles, or the heirs’ personal finances to cover a shortfall if the home sells for less than the mortgage balance.
If you are navigating an inherited property or planning an estate, let me know if you need help understanding the timeline heirs have to respond to the lender, or how to initiate a property appraisal to trigger the 95% payoff option.
How the 95% Rule Works
If the reverse mortgage borrower passes away or permanently moves out, the loan becomes due and payable. If the loan is “underwater” (the balance is higher than the home’s value), the heirs have options based on this rule:
Keeping the House: Heirs do not have to pay the full, bloated loan balance. They can settle the debt and keep the property by paying either the full loan balance or 95% of the current appraised value, whichever is less. The remaining deficit is covered by the FHA’s mutual mortgage insurance fund.
- Selling the House: If the heirs choose to sell the home to an outside buyer instead of keeping it, they can sell it for up to 95% of the appraised value. The net proceeds go toward the loan balance, and the rest of the debt is forgiven.
- Walking Away: If heirs have no interest in the property, they can sign a deed-in-lieu of foreclosure or let the lender foreclose. They will owe absolutely nothing.
The 95% rule on a reverse mortgage allows your heirs to buy and keep the home for 95% of its current appraised market value if the outstanding loan balance has grown larger than what the property is worth.