Mom or Dad had a reverse mortgage. What happens to the house now?

If the reverse mortgage is a Home Equity Conversion Mortgage, a HECM, insured by the Federal Housing Administration (the servicer's letters and the recorded mortgage will say), the rules below are HUD's rules for it. If the loan is a private, non-FHA reverse mortgage, its own note controls, and the servicer and an attorney have to read it.

HUD's regulation requires the mortgage to say that the outstanding loan balance is due and payable in full if a borrower dies and the property is not the principal residence of at least one surviving borrower, or if a borrower conveys all of his or her title and no other borrower keeps title. The same regulation lists the other triggers: the house stops being a borrower's principal residence for reasons other than death, a borrower is out of the house for more than 12 consecutive months because of physical or mental illness, property charges such as taxes and insurance go unpaid, or another obligation of the mortgage isn't performed. Those last ones need HUD's approval before the loan is called.

HUD's brochure for heirs puts it in one line: the loan balance becomes due and payable when the borrower sells the home, no longer occupies it as their primary residence, or upon the death of the last surviving borrower, and at that point no more funds may be disbursed from the HECM. The brochure also says property taxes and insurance on the property remain the responsibility of the borrower's estate until title is transferred.

A surviving spouse who was never on the loan is a special case. The regulation requires the mortgage to defer the due-and-payable status that occurs because of the death of the last surviving borrower for an Eligible Non-Borrowing Spouse, and HUD's brochure says that spouse must provide the lender with a Non-Borrowing Spouse Certification within 30 days of the last surviving borrower's death, among other requirements. If that's your family, the servicer and an attorney come before any talk of selling.

The regulation sets the servicer's first move. After notifying HUD, the servicer notifies the borrower, an eligible non-borrowing spouse, the borrower's estate, and the borrower's heirs, as applicable, that the mortgage is due and payable, and gives the applicable party 30 days from the date of notice to engage in one of these actions:

• Pay the outstanding loan balance in full, including accrued interest, mortgage insurance premium, and the servicer's advances.
• Sell the property for an amount not less than the amount HUD sets by notice, which can't exceed 95 percent of the appraised value, with the net proceeds applied to the loan balance. The regulation adds that "sell" includes a transfer of title by operation of law.
• Provide the servicer with a deed in lieu of foreclosure. The regulation requires the servicer to accept one from the borrower or another party with the legal right to dispose of the property if it's filed for recording within 9 months of the due date and the servicer can get good and marketable title.
• Correct the condition that made the loan due, for reasons other than the death of the last surviving borrower. Death can't be corrected, so for heirs this one doesn't apply.

There is a fifth path the regulation doesn't list as an option, because it's what happens when nobody takes one: the servicer forecloses. HUD's brochure for heirs says plainly that the estate or heirs may sell the home, pay off the loan, or transfer title to the lender through a deed in lieu of foreclosure to avoid foreclosure, and that if you prefer to keep the home, the loan balance must be paid in full.

Keeping the house and selling it are priced differently. To keep it, the full balance is paid. To sell it, the servicer accepts the net proceeds of a sale at the HUD-set amount, up to 95 percent of appraised value, even when that's less than the balance. The CFPB's page says the rest of the loan is covered by the mortgage insurance. Which path makes sense for your family depends on what the house is worth against what's owed, and that is a conversation for the servicer, a HUD-approved housing counselor, and the estate's attorney, not a buyer.

HUD's regulation requires the mortgage to say that the borrower shall have no personal liability for payment of the outstanding loan balance, that the mortgagee shall enforce the debt only through sale of the property, and that the mortgagee shall not be permitted to obtain a deficiency judgment against the borrower if the mortgage is foreclosed. The estate's attorney can tell you what that means for the estate and for you; the heirs didn't sign the note.

What the family can lose is the house and the equity in it, if any, plus the carrying costs while it sits. What it can't do is owe the lender the difference between the balance and what the house brings. That's what the CFPB means when it says the rest of the loan is covered by the mortgage insurance.

When a HECM is due and payable, the regulation lets the borrower or other party with the legal right to dispose of the property sell it for the amount HUD sets, which can't be more than 95 percent of the appraised value. HUD's Mortgagee Letter 2017-11 states the number it will accept: when a HECM is due and payable, the borrower, eligible non-borrowing spouse, borrower's estate, or borrower's heirs may sell the property for a minimum of 95 percent of the appraised value. The brochure for heirs says the same thing in plain words: if the loan balance is more than the home is worth, the estate or heirs may sell the home for at least 95 percent of the current appraised value and the lender will accept the net proceeds as satisfaction of the loan.

The appraisal is the servicer's, not the buyer's and not the estate's. The regulation requires the servicer to have the property appraised by an appraiser on the FHA roster no later than 30 days after a request from an applicable party in connection with a potential sale, at the servicer's expense when the loan is due and payable, with a right to be reimbursed out of the sale proceeds. The regulation also caps the closing costs the servicer will recognize in such a sale, at the greater of 11 percent of the sales price or a fixed amount HUD publishes.

So a 95 percent sale has two numbers in it that nobody in your family sets: the servicer's appraisal, and the amount HUD will accept against it. A buyer can make a written offer; whether that offer satisfies the loan is the servicer's call, in writing, against its appraisal. Ask the servicer how it wants a short payoff submitted before you sign anything.

HUD states the timeline in three places, and they don't read identically, so here is each one as written. The regulation: the servicer gives the applicable party 30 days from the date of its due-and-payable notice to take one of the actions above, and the servicer must commence foreclosure within six months of the due date, or within such additional time as HUD approves. HUD's brochure for heirs: the loan must be satisfied within 30 days of the date of the borrower's death, and the lender may approve 90-day extensions with satisfactory documentation that the estate or heirs are actively trying to sell the property or repay the HECM loan. The Consumer Financial Protection Bureau's page: after the notice, heirs have 30 days to buy, sell, or turn the home over to the lender, and it might be possible for the timeline to be extended up to six months so heirs can sell or get their own financing.

We can't tell you how long you have, and neither can any page that gives you one number. The servicer can, in writing, for your loan: the date of the notice, what extensions it has granted, what documentation it wants to grant another, and the date it intends to start foreclosure if nothing is done. Get that letter first. A HUD-approved housing counselor can read it with you; HUD's brochure lists the FHA Resource Center at (800) 225-5342.

What the clock doesn't stop is the carrying cost. HUD's brochure says taxes and insurance stay the estate's responsibility until title transfers, and the Illinois Probate Act says the estate's representative pays the taxes, mortgages, and other liens on the decedent's real estate as they come due during administration. Interest and insurance premium keep accruing on the loan balance too. Every month the house sits, there's less equity, if there was any to begin with.

HUD's rules say who may sell: the borrower's estate or heirs, or another party with the legal right to dispose of the property. Illinois law says who that is. If the house is in the deceased borrower's name alone, the person with authority is the estate's representative, the executor or administrator the probate court appoints and names in its letters of office. In independent administration, which is what most Illinois estates get, the Probate Act lets the representative sell the decedent's real estate at public or private sale, for cash or on credit, without a court order. Our page on how to sell an inherited house in Illinois covers letters of office, independent versus supervised administration, and what the title company will ask for.

If the house was held in joint tenancy with a surviving owner, in a living trust, or passed by a transfer on death instrument, the survivor, trustee, or beneficiary may be the party with the right to sell, and probate may not be needed. The title company reads the deed and tells you; the estate's attorney tells you what the servicer will accept as proof of authority. The servicer will want proof of who has authority before it accepts a payoff or a deed.

Two more Illinois points. The Residential Real Property Disclosure Act exempts a fiduciary administering a decedent's estate from the seller disclosure report, so the representative doesn't complete the form an owner-occupant would, though any buyer will still ask what the family knows. And if several heirs disagree about selling, our guide on an inherited house with siblings when one won't sell covers who decides. The reverse mortgage adds urgency to that disagreement, not a new rule: the servicer's clock runs whether or not the family has agreed.

Yes, we buy houses with a reverse mortgage on them, including when the balance is more than the house is worth. We buy inherited houses as they stand, with the contents inside, and no cleanout or repairs are required to get a written offer. A reverse mortgage changes who has to approve the price, not what we look at. We walk the house once, put an offer in writing to the estate, and the title company orders the payoff from the servicer like any other lien. If the balance is below the price, the loan is paid at closing and the estate keeps the rest. If the balance is above the price, the sale only closes if the servicer accepts the net proceeds under the 95 percent rule against its own appraisal.

That second case has a sequence to it, and it's the servicer's: notice, appraisal, a written offer with the settlement figures, the servicer's approval of the short payoff, then closing. The estate's attorney submits it; we provide the contract and the figures and wait for the servicer's answer. We don't promise what the appraisal will say, and we don't set a closing date until the servicer has approved the payoff.

The trade-off is the usual one. A cash offer is below what a cleaned-out, repaired, listed house would bring. What it buys is a closing that doesn't depend on a buyer's financing or on the house being emptied first, inside a window the servicer controls. If the house is worth well more than the balance, listing it may be the better path, and a HUD-approved counselor can help you weigh that. We'd rather you know that before you call.