Death, a Vacant House, and a Servicer in a Hurry
Harriet, 81, took a HECM four years ago with a $300,000 principal limit, a tenure payment, and no non-borrowing spouse. She died in March. The servicer's file shows an unpaid loan balance of $212,000 as of the death date, an appraisal of $285,000 obtained in April, and two adult children who live in other states and want to keep the house. They plan to rent it out for a year while they decide. The current-year property taxes of $4,100 are unpaid, and the hazard policy was cancelled in February when the insurer learned the home was vacant. In June the son calls and says, 'We're told you can't foreclose for a year and we can just pay whatever the house is worth if we want it.' A colleague suggests sending the due-and-payable notice, force-placing insurance, and referring the file to foreclosure in month four so the claim doesn't age.
1. Evaluate the colleague's plan: notice, force-placed insurance, and a foreclosure referral in month four.
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Split the plan into its parts.
- Due-and-payable notice: correct. Death of the last borrower is a due-and-payable event, and the servicer must notify the estate/heirs and explain the options and timeline.
- Force-placed insurance: proper and prudent. The property is vacant and uninsured; protecting the collateral is the servicer's right and duty, and the premium is added to the balance and therefore to the payoff. Notice to the heirs should precede or accompany it, and the cost should be documented.
- Foreclosure in month four: not permitted. The heirs have six months from the due-and-payable date to pay the debt or sell, extendable by up to two additional 90-day periods (a maximum of 12 months) where the property is being actively marketed and the required conditions are documented and approved. A referral at month four, absent abandonment or another immediate trigger, is premature and creates servicing and claim risk.
Also correct the son's assumption: renting the house does not pause the timeline, and 'paying what the house is worth' is a rule with conditions, not a free option.
2. The children want to keep the home. Explain how they can do it and how much they must pay, and address the 95% rule.
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They keep it by satisfying the debt: the outstanding balance plus accrued interest, servicing fees, and any advances such as the force-placed insurance and the unpaid taxes - roughly $212,000 plus those items as of the payoff date. They can fund that with their own money or a new mortgage; the HECM itself cannot be assumed.
The 95% rule limits what a sale must produce, not what a purchase by the heirs costs. The debt is satisfied by the lesser of the loan balance or 95% of the appraised value. Here 95% x $285,000 = $270,750, which is more than the $212,000 balance, so the rule gives them nothing - they owe the full balance.
Illustrate the other direction: if the balance had been $310,000, they could have satisfied it with $270,750 and FHA would have covered the shortfall on the claim; the difference would never be a personal debt, because the loan is non-recourse.
If instead they sell to a third party, the sale must net at least 95% of the appraised value to avoid a deficiency on the insurance claim. At the $285,000 appraisal, a sale would clear the loan and leave roughly $73,000 before costs and the tax and insurance advances.
3. The children are slow to decide and miss the six-month date. What should the servicer do, and what must be documented?
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The servicer should evaluate extensions before, not after, the deadline. Up to two 90-day extensions (12 months total from the due-and-payable date) are available where the heirs are actively marketing the property and the conditions in HUD's requirements are met - listing agreement, appraisal, evidence of marketing activity, current insurance, and a realistic asking price.
File documentation should include: the date of death and due-and-payable date; copies of the notices sent to the estate and heirs; the appraisal; evidence of marketing efforts; the insurance force-placement record and cost; the tax advance; the extension requests and approvals with dates; and a contact log. The servicer must not foreclose while a sale is progressing in good faith, and must not sit silent and then foreclose without warning.
If the heirs stop cooperating, the servicer may proceed - but only after the repayment period and any approved extensions have run, and never as a race to protect the claim. The foreclosure timeline should be driven by the rule, not by internal claim-age pressure.