What Happens to an FHA Home Loan When the Borrower Dies?

FHA home loans are subsidized by the Federal Housing Administration. There are various types of mortgages that fall under this umbrella, but they're usually designed to make it easier for borrowers to afford a house. One specialty of these loans is the down payment, or the amount of money borrowers must pay upfront. Federal Housing Administration loans have low down-payment requirements — as low as 3.5 percent of the mortgage — although, in return, they require mortgage insurance payments. In other ways, FHA loans act much like conventional loans — payment is typically required upon the death of the borrower.

Home loans aren't directly controlled by the Federal Housing Administration even when they're subsidized. The administration creates general requirements for its mortgages, but the details and most of the terms are still decided by the lenders themselves. For this reason, an FHA home loan is usually treated like a conventional loan when the borrower dies. This also means that laws governing loans upon a borrower's death may change from state to state, although certain aspects of these laws remain similar throughout the country.

Like other mortgages, various parts of an FHA loan are governed by the mortgage contract itself. In certain cases, lenders put clauses into the contract that allow heirs to take over a loan after a borrower dies, though often only if they pass a credit check. This allows heirs to keep FHA-purchased houses and keep making payments on the loans involved. The primary difference in this case is that FHA loans require additional mortgage insurance payments from the heirs — the same payments that the original borrower had to make.

Lenders usually add in clauses that require immediate payment of the mortgage in full if the borrower dies. The estate must typically sell the house to pay these debts. If debt payments are late, the lender still has the ability to foreclose on the house. Heirs may be able to work out a deed in lieu of foreclosure to prevent this. If the estate has enough funds to pay off the loan without selling the house, then the heirs can keep the property.

HECM stands for home equity conversion mortgage, a type of reverse mortgage offered by the Federal Housing Administration to help older borrowers. A reverse mortgage doesn't collect payments on the loan while borrowers are alive and owning the property, but it keeps tabs on interest and collects funds from the equity in the house if it's sold or if the owner dies. In this case, if the borrower dies, the Federal Housing Administration loan strictly governs what happens to the property when the borrower dies. The equity of the house is used to pay off the mortgage plus any accumulated interest, instead of requiring borrowers to pay while they were alive. This means that the house must be sold to close the loan. This is only available for borrowers that use the house as their primary residence.