What Is the 95% Rule on a Reverse Mortgage?

The 95% rule on a reverse mortgage is one of the most important protections for heirs when a HECM comes due. If you have wondered what happens to the home after you are gone—or whether your family could owe more than the house is worth—this rule is worth understanding clearly.

This guide explains what the 95% rule is, how it fits with the broader non-recourse guarantee, who it applies to, and what it means in practice for California homeowners.

For related reading on staying in the home during your lifetime, see Can I Lose My Home With a Reverse Mortgage?.

What happens when a reverse mortgage comes due?

A HECM reverse mortgage becomes due and payable when one of the following occurs:

• The last surviving borrower passes away
• The last surviving borrower permanently moves out of the home
• The home is sold
• The borrower fails to meet ongoing loan obligations (taxes, insurance, maintenance)

When the loan becomes due, the outstanding balance—principal plus accrued interest and FHA mortgage insurance and allowable fees—must be repaid. In many cases, the home is sold and the loan is repaid from the proceeds.

The harder question is what happens when the loan balance has grown larger than the home is worth. That is where the non-recourse guarantee and the 95% rule matter most for heirs.

Understanding the non-recourse guarantee first

A HECM reverse mortgage is a non-recourse loan: the lender's recovery is generally limited to the home itself. Heirs are not personally liable for loan balances beyond the property's value in a qualifying settlement scenario.

FHA mortgage insurance (funded in part by the mortgage insurance premiums paid over the life of the loan) can cover the shortfall between the loan balance and what the program allows to be collected from the property—so your heirs are not asked to write a personal check for negative equity.

The 95% rule is a specific heir-focused application of that protection when heirs want to keep the home rather than sell it.

The 95% rule explained

When a reverse mortgage comes due, heirs can sell, refinance/pay off, or—in certain upside-down situations—walk away without personal liability. If heirs want to keep the home, they need to pay off the loan.

Under HUD regulations for HECM loans, heirs may be allowed to satisfy the loan by paying 95% of the home's current appraised value—even if the outstanding loan balance is higher than that amount (subject to program rules, timelines, and servicer process).

Example: Say the home's appraised value at settlement is $600,000, and the loan balance is $720,000. Ninety-five percent of appraised value is $570,000. If the heir qualifies for that payoff path under program rules, the gap between what the heir pays at the 95% threshold and the loan balance can be addressed through FHA insurance—not by chasing heirs for the difference from their other assets.

Why 95% and not 100%?

The 5% discount exists because a real-world sale usually involves costs—commissions, closing costs, transfer taxes—that often fall in a range that HUD has historically described as roughly in the neighborhood of typical transaction costs. The 95% threshold is intended to approximate what a lender might reasonably net from an arm's-length sale, while still giving heirs a practical path to retain the home without paying the full inflated balance when the loan exceeds value.

The 95% rule vs. simply selling the home

When a reverse mortgage comes due, heirs commonly consider three paths:

Option 1 — Sell the home

Sell at market value (subject to normal sale process). The loan is repaid from proceeds. If sale proceeds exceed the loan balance, heirs keep the difference. If proceeds are less than the loan balance, FHA insurance covers the shortfall—heirs do not owe the difference personally.

Option 2 — Keep the home using the 95% rule

Heirs may satisfy the HECM by paying 95% of the current appraised value, often using a new conventional mortgage or other estate funds. This can allow the family to retain the property even when the loan balance has grown above current value, subject to appraisal and program requirements.

Option 3 — Deed in lieu of foreclosure

If heirs do not want to sell or keep the home, they may be able to complete a deed-in-lieu process in qualifying circumstances. The goal of non-recourse treatment is that heirs are not personally chased for negative equity beyond the home itself.

Heirs typically have about 12 months from when the loan becomes due to decide and complete the transaction, with possible extensions in some cases when a sale is listed or refinancing is actively pursued (extensions are not automatic—servicer and HUD rules apply).

What this means for California homeowners

California home values—and long holding periods—can mean loan balances grow large. That can make the non-recourse framework and heir payoff rules especially relevant for families weighing a HECM as part of retirement cash flow while still caring about what happens later.

Appreciation can also change the picture: if the home is worth more than the loan balance at settlement, heirs may simply sell, pay off the loan, and keep remaining equity. The 95% rule is most relevant when the loan balance is at or above the home's value at the time the loan is due.

Does the 95% rule apply to proprietary reverse mortgages?

The 95% rule is tied to FHA-insured HECM program rules. Proprietary (non-FHA) reverse mortgages in California (including some age-55 programs) follow lender-specific documents. Many proprietary loans include non-recourse concepts, but the exact heir payoff threshold may differ from the HECM 95% standard. Ask your specialist to explain heir options in writing for the specific product you are considering.

Frequently asked questions

Do heirs have to use the 95% rule?

No. It is an option when heirs want to keep the home. Selling at market value—or walking away in qualifying upside-down scenarios without personal liability—may be viable alternatives depending on facts, timelines, and program rules.

What if the home is worth more than the loan balance?

Then heirs often sell (or refinance the payoff), repay the loan, and keep the net equity. The 95% rule is not the limiting factor in that situation.

How is value determined for the 95% calculation?

HUD requires an independent appraisal when the loan becomes due. The 95% figure is based on that appraisal—not an online estimate, not the value from when the loan closed, and not an informal opinion of value.

Can heirs get a new mortgage to fund the 95% payoff?

Often yes, when heirs qualify. The heir would apply for financing consistent with normal underwriting, using the appraised value and the payoff rules that apply to your loan.

The bottom line

The 95% rule is a powerful HECM heir protection concept: when the loan is due, heirs may have a path to keep the home by paying 95% of current appraised value even if the loan balance is higher—combined with non-recourse protections that prevent your family from inheriting personal debt beyond the home itself (subject to program compliance and servicer requirements).

For California homeowners with meaningful equity and multi-generational homes, understanding this framework is an important part of deciding whether a reverse mortgage fits your retirement and estate planning goals.

About the author

Jay Zayer is a Certified Reverse Mortgage Professional (CRMP) and licensed specialist serving homeowners 55+ in California and Arizona (CA DRE #01456165, NMLS #307713). He focuses on clear numbers, realistic timelines, and what happens next—for you and your heirs.

Learn more about Jay →

This material is not from HUD or FHA and has not been approved by HUD or any government agency. All reverse mortgage loans are subject to credit and property approval. Terms and conditions may apply. This content is for educational purposes only and does not constitute financial or legal advice.