How Does a Reverse Mortgage Work When You Die?

When the last borrower on a reverse mortgage dies, the loan comes due and the estate has to settle it, usually within about six months. Under the rules that govern what happens to a reverse mortgage when you die, the heirs can pay off the balance and keep the home, sell it and pocket any remaining equity, or hand the property to the lender. Because the loan is non-recourse, no one ever owes more than the house is worth.

Almost everything below applies to a Home Equity Conversion Mortgage (HECM), the FHA-insured product that makes up the vast majority of reverse mortgages. Private “proprietary” loans work similarly in spirit but follow the lender’s own terms, not HUD’s.

The Non-Recourse Rule Shapes Everything

A HECM is a non-recourse loan. The lender’s only security is the house.{¹ If the balance has grown larger than the home’s value, the lender cannot come after the estate’s bank accounts, other property, or the heirs personally. FHA insurance absorbs the shortfall.

That single fact drives every decision heirs have to make. A loan balance that looks alarming on paper does not create a personal debt for anyone in the family.

The Three Options for Heirs

Once the servicer sends a formal Due and Payable Notice, heirs choose among three paths.{² Which one makes sense depends almost entirely on the loan balance compared to the home’s current appraised value.

Keep the Home

If the heirs want to keep the property, they have to pay off the loan, typically by refinancing into a conventional mortgage or using other funds. When the home is worth more than the balance, the payoff is the full amount owed, including accrued interest and mortgage insurance premiums.{³

When the balance is higher than the home’s value, the rules give heirs a meaningful break. They can buy the property for 95 percent of its current appraised value, regardless of how large the loan balance has grown.{² So if the loan balance is $350,000 and the home appraises at $300,000, an heir can buy it for $285,000. The rest is written off through FHA insurance.

Sell the Home

Heirs can list and sell the property and use the proceeds to pay off the reverse mortgage. The sale must bring in at least 95 percent of appraised value, with closing costs capped at the greater of 11 percent of the sale price or a fixed amount set by HUD.{³ Any sale proceeds above the loan balance belong to the estate. Any shortfall is covered by FHA insurance, not the family.

Walk Away

When the balance is close to or above the home’s value and no one wants to keep it, heirs can sign a deed-in-lieu of foreclosure or simply let the lender foreclose.{³ Because the loan is non-recourse, walking away creates no personal debt and does not affect the heirs’ credit scores.

The Timeline After the Death

The clock that matters most is the six-month foreclosure deadline. Servicers are required to begin foreclosure proceedings within six months of the loan becoming due unless HUD grants more time.{³ Starting foreclosure is not the same as losing the home; it is the legal deadline for the servicer to act if the loan has not been resolved.

Heirs who are actively trying to sell or refinance can request up to two 90-day extensions. To get them, the servicer needs proof of progress, such as a signed listing agreement, a pending sales contract, or a refinance application in process. If both extensions are approved, the total window runs to roughly a year from the due date.

A practical sequence for heirs:

Contact the servicer as soon as possible after the death and send the death certificate along with any will, trust, or probate paperwork identifying who can act for the estate.
Within about 30 days of the Due and Payable Notice, tell the servicer which path the estate is taking.
Keep paying property taxes, homeowners insurance, and any HOA dues until the loan is satisfied or the property is transferred. Falling behind on these can accelerate the process.

There is no regulatory countdown running against the heirs themselves, but silence is what puts homes into foreclosure. Delays in opening probate are one of the most common reasons families run out of time, because nobody has legal authority to sign anything until it is done.{⁴

If a Non-Borrowing Spouse Survives

When one spouse was on the HECM and the other was not, the survivor may be able to stay in the home without paying off the loan. This is called a Deferral Period, and it prevents the surviving spouse from being displaced. It is not automatic. The spouse has to meet every qualifying condition and provide documentation to the servicer.{⁵

To qualify, the spouse must have been:

Married to the borrower when the HECM was originated, and still married at the borrower’s death.
Disclosed to the lender at origination and specifically identified as a non-borrowing spouse in the loan paperwork.
Living in the property as a principal residence, and continuing to live there during the deferral.

A spouse who did not meet these conditions at closing cannot qualify later. If any condition stops being met, the deferral ends and the loan becomes due.

During the deferral, the servicer collects an annual certification confirming that the property is still the spouse’s principal residence and that the qualifying conditions still hold.{⁶ Missing it can jeopardize the deferral.

The deferral preserves the right to remain in the home. It does not eliminate other obligations. The surviving spouse still has to pay property taxes, homeowners insurance, and keep up maintenance; falling behind can end the deferral and make the loan immediately due. Divorce also terminates eligibility. And no further loan proceeds are available during the deferral, so any line of credit or monthly payments stops when the borrower dies.

Adult Children and Other Household Members

Federal deferral protections apply only to eligible non-borrowing spouses. Adult children, other relatives, and dependents who lived in the home have no right to remain after the borrower dies unless they pay off the loan.{⁷ This is one of the biggest surprises families run into, particularly when an adult child has been caring for a parent in the home. The child’s options are the same as any other heir: pay off, refinance, or sell.

Tax Consequences

Two tax questions come up after the borrower’s death.

The first is cancellation of debt. When a HECM settles for less than the full balance, the forgiven amount could theoretically look like taxable income. Because the loan is non-recourse, the IRS treats the unpaid balance as part of the “amount realized” in a deemed sale of the property rather than as ordinary income.{⁸{⁹ The estate may report a capital gain or loss, but it does not owe income tax on the forgiven balance.

The second is stepped-up basis. When an heir inherits a home, the tax basis resets to the fair market value on the date of the owner’s death.{¹⁰ If an heir sells shortly after inheriting, the sale price and the stepped-up basis are usually close, so capital gains tax is typically minimal. The reverse mortgage balance is a debt of the estate and does not enter the basis calculation.

Proprietary Reverse Mortgages Are Different

Everything above describes how a HECM works. Proprietary reverse mortgages, sometimes called jumbo reverse mortgages, are private products not backed by FHA. They usually carry non-recourse protection, but the specifics on heir options, timelines, and spouse protections vary by lender. If the deceased had a proprietary reverse mortgage, the loan documents and the servicer are the only reliable guides. Do not assume HECM rules apply.

1
Department of Housing and Urban Development. HUD Handbook 4235.1 REV-1 – Home Equity Conversion Mortgages
2
U.S. Department of Housing and Urban Development. Mortgagee Letter 2022-15 – Update to HECM Program Requirements for Notice of Due and Payable Status
3
eCFR. 24 CFR 206.125 – Acquisition and Sale of the Property
4
National Reverse Mortgage Lenders Association. What Do I Do When My Loan is Due
5
eCFR. 24 CFR Part 206 Subpart B – Eligibility; Endorsement
6
FHA Resource Center. What Are the Ongoing Requirements for HECM Borrower and Non-Borrowing Spouse Certifications
7
Consumer Financial Protection Bureau. Does Having a Reverse Mortgage Impact Who Can Live in My Home?
8
Internal Revenue Service. Publication 4681 – Canceled Debts, Foreclosures, Repossessions, and Abandonments
9
Internal Revenue Service. Topic No. 431, Canceled Debt – Is It Taxable or Not?
10
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent