According to a posting from NRMLA regarding HUD Mortgage letter 2008-38, “Clarification Regarding Borrower’s Recourse for Repayment of HECM Loan Debt and Termination of Hecm Mortgage”:
For years, FHA-insured Home Equity Conversion Mortgages (HECMs) generally have been characterized by the FHA, lenders and consumer advocates alike as “non-recourse” loans where the borrower can never owe more on the HECM loan than what the house is worth at the time the loan is paid back.
HUD states in the mortgagee letter that non-recourse only applies to situations where the property is sold to pay off the debt. If the heirs wish to retain ownership, the mortgage balance must be paid in full.
If the home is sold, “the property may be sold for at least the lesser of the unpaid mortgage balance or 95% of appraised value,” the letter adds.The Department further clarifies that the sale of the home must be an arms-length transaction, defined as follows: (1) the absence of a relation between the buyer and seller; (2) a selling price and other conditions that would prevail in an open market environment; (3) transaction costs paid by the seller that are considered both reasonable and customary for the market in which the property is located; and (4) the adherence to ethical standards of conduct by all parties involved in the HECM short sale transaction, including the borrowers (or the estate), mortgagees and appraisers.