You're scrolling listings, and you see it — "property sold subject to HUD guidelines 24 CFR 206.125." Or maybe you just got a due-and-payable letter after a parent passed away and you're trying to understand what happens next. Either way, the code sounds like bureaucratic noise, but it actually governs the entire transaction.
In simple terms, these are just guidelines for what happens to a property when a reverse mortgage has to be paid back. A reverse mortgage is a loan that lets homeowners aged 62 or older convert part of their home equity into cash without having to sell or make monthly payments.
Reverse mortgages can be beneficial for seniors with a lot of equity in their home. However, there are very specific rules that, if not followed closely, can lead to foreclosure.
Some reverse mortgage foreclosures are excellent deals, which is why investors tend to hunt for them. Though they may cause headaches for those who have inherited the home, who must figure out whether they can keep it or have to sell.
In this article, we’ll discuss what this code covers, the specific rules that apply to buyers, what options heirs have, and what to watch out for.
What does HUD 24 CFR 206.125 mean?
This code refers to the section of federal housing regulation (Title 24 of the Code of Federal Regulations) that determines how a property with a Home Equity Conversion Mortgage (HECM) must be sold after the loan becomes due and payable.[1] A HECM is an FHA-insured reverse mortgage that is covered in these guidelines.
When does a HECM become due and payable?
An HECM typically becomes due and payable in three circumstances:
- The borrower passes away
- The borrower permanently moves out
- The borrower fails to pay taxes/insurance
After foreclosure, the lender reclaims the property and lists the home under these rules — which is why you see the code in listing descriptions. This is a lender-owned REO, like other foreclosures, but has very strict rules that must be followed.
The rules buyers must follow
A 24 CFR 206.125 property comes with strict guidelines that buyers must follow in order to keep the home and avoid foreclosure. Below, we’ll break down how to buy a HUD home, what these rules are and why they’re in place.
1. The price is non-negotiable, but it does change
A 24 CFR 206.125 property cannot be sold below its appraised value, and there are no counter-offers allowed. This is to make sure the FHA insurance fund is properly reimbursed for any losses incurred on the mortgage.
Lenders will re-appraise approximately every 90 days, meaning the price will usually drop after a property has been sitting on the market. A skilled agent who tracks these listings regularly can help buyers time an offer.[1]
Practical tip: If a property has been on the market 60-90+ days, watch for a re-appraisal window.
2. The property is sold as-is, no exceptions
This type of property is always sold as-is. No repairs. No credits. No seller-paid closing costs. This helps the lender recover the necessary funds through the sale and not lose money investing in repairs.
Additionally, the utilities will be shut off to avoid ongoing expenses. The buyer can pay to have them turned back on for an inspection, usually costing around $100. The buyer's agent can help coordinate this. However, the seller won't contribute to any repair costs.
3. Deposit, financing, and closing timeline
Buyers also must follow strict deposit and escrow requirements. This helps streamline the process while protecting the FHA insurance fund.[1]
- Cash offers require a 10% deposit submitted as a cashier’s check, and typically have a 30-day close.
- Financed offers require a minimum deposit of $1,000, also in the form of a cashier’s check. They typically have a minimum escrow period of 60 days (sometimes longer if title issues arise).
- Electronic signatures are not accepted and must be completed using paper forms only.
- FHA financing is allowed, but the property’s as-is condition may disqualify it.
- No agent transaction fees are allowed on the HUD side, regardless of who is paying.
HOA and transfer costs fall on the buyer
During a CFR 206.125 transaction, the buyer is responsible for all HOA document fees, transfer taxes, and any HOA transfer fees at the time of closing. The seller will not typically contribute to any of these costs.
What heirs and family members need to know
When the borrower passes away (or moves to a care facility), the loan becomes due and payable. Heirs have 30 days from the lender's notice to decide on a course of action. This process can often feel daunting for heirs.
Levi Rodgers, co-founder at VA Loan Network, says many heirs many don’t realize how many steps are involved.
“What surprises heirs the most is the fact that they cannot automatically assume ownership of the house without any strings attached, even though they inherited the property.”
Whether the goal is ownership or selling the property, we’ll break down the options heirs have and how to choose the best one for your circumstances.
1. Pay off the loan in full
Heirs have the option to keep the home by paying off the loan amount. This can be done by refinancing the reverse mortgage into a traditional mortgage, or paying off the loan with other funds.
Who it’s best for: Heirs wanting to live in the home, keep it as a family property, or use it as a rental.
2. Sell the property
Heirs can sell the property for at least 95% of the appraised value. The net proceeds will then go to the lender. If the home is worth more than the loan balance, heirs can use funds from the sale to pay the balance and keep the difference.
Who it’s best for: Heirs who want to recover any remaining funds without keeping the home.
3. Deed in lieu of foreclosure
Heirs can voluntarily transfer ownership back to the lender to avoid a formal foreclosure process. This must be filed within a specific timeframe set by HUD. In this case, heirs will not be responsible for any remaining balance, and will not receive funds from the sale.
Who it’s best for: Heirs who don’t want to manage the sale themselves and are okay with not making any money from it.
4. Do nothing
Lastly, heirs can choose to take no action. In this case, the lender will move forward with the foreclosure. The heir receives nothing, and they are not responsible for any remaining balance.
Who it’s best for: Heirs who want to be removed from the process altogether, or don’t have the margin to go through any formal process due to personal circumstances, etc.
The 95% rule
The most critical protection that many heirs are not aware of is the 95% rule. This rule states that if the loan balance is greater than the home's value, heirs only owe 95% of the current appraised value; FHA insurance covers the rest.
For example: A homeowner passes away with a balance of $420,000 on their home mortgage, but the home is appraised at $350,000. Under this rule, heirs can keep the home by only paying 95% of the appraised value ($332,500). The remaining balance is covered by FHA insurance.
Important reminder: Don't ignore the due-and-payable letter. The 30-day response window is real.
Buying a 24 CFR 206.125 property: Pros and cons
While these properties can be a great opportunity for the right person, it’s important that buyers thoroughly understand the benefits and downsides before deciding to go this route.
Pros
- Less competition
- Predictable price drops
- Appraiser-verified property
- Faster close on cash offers
Cons
- Price is firm
- Buyer absorbs closing costs and transfer fees
- Property condition unknown
- Fewer financing options
- Easy for agents to make mistakes
- Minimum 60-day close
Buyers tend to skip over these properties due to their complexity, so there’s usually less competition. Prices lower on a predictable ~90-day cycle, meaning buyers can secure a better deal if they’re willing to spend time looking.
HUD properties are professionally assessed by a certified appraiser to ensure the buyer is not overpaying and the seller receives a fair price. And cash buyers can close in about 30 days, compared to 45-60 days for a traditional transaction.
On the other hand, prices are not negotiable for HUD homes; the property must sell at its current appraised value. Buyers are responsible for closing costs, transfer taxes, and any other related expenses. The seller does not typically help with these costs.
Another big potential drawback is that because the utilities are shut off and the property is sold as-is, the condition is often unknown. This could lead to significant repair costs. Buyers hoping to use an FHA loan might also be out of luck; due to property condition requirements, the home may not qualify for FHA loans.
These are complicated sales even for experienced agents because of the strict guidelines, so even a small mistake can disqualify a buyer. Inexperienced agents can get your offer rejected on a technicality. Finally, financed deals usually require at least a 60-day closing timeline. This can stretch longer if issues arise.
These properties can be great deals for experienced buyers who go in with eyes open and a good agent. However, purchasing a HUD home can also be a disaster for uninformed buyers. It’s important for buyers to be prepared and well-informed.
Rodgers says flexibility and patience are key during this process. “The only problem [buyers] tend to face is the timing of the reverse mortgage payoff, as they are better off purchasing a reverse mortgage payoff home if they are flexible, patient, and prepared to deal with additional paperwork.”
Finding the best agent for this type of purchase
Did you know that most agents have never closed a 24 CFR 206.125 transaction? This is especially important to keep in mind when looking for an agent. Hiring the wrong person can get your offer rejected or cause buyers to overpay.
What questions should you ask?
Having clear, well-thought-out questions will help buyers sift through inexperienced agents and find the ones who can help.
What to ask an agent:
- Have you closed on a reverse mortgage REO/24 CFR 206.125 property before?
- Are you familiar with the addendum and paperwork requirements specific to these deals?
- How do you track re-appraisal cycles on these properties?
What do experienced agents do differently?
Experienced agents track listings from day one. They’re familiar with the 90-day cycles and know when to expect price drops. They also know the paperwork cold and will make sure nothing slips through the cracks.
Your agent will also coordinate utility activations and inspections efficiently, and make sure you’re fully aware of the property’s condition beforehand.
Clever can match you with a top local agent who has experience with REO and foreclosure transactions. Take a short quiz to find an agent today.
FAQ
Can you negotiate the price on a 24 CFR 206.125 property?
No, the property can't sell below the appraised value, and the lender won't entertain lower offers. However, the lender re-appraises the property approximately every 90 days, so list prices do drop over time on properties that don't sell. Working with an agent who tracks these listings means you can time an offer right after a price reduction.
Can heirs keep the home after a reverse mortgage borrower passes away?
Yes. heirs have 30 days from the lender's due-and-payable notice to decide. Options include paying off the loan balance (or 95% of appraised value, whichever is less) to keep the home, selling it, signing a deed in lieu of foreclosure, or allowing foreclosure. Heirs have no personal liability for any amount owed above the home's value.
Can you use an FHA loan to buy a 24 CFR 206.125 property?
Technically, yes — FHA financing is allowed. But because these properties are sold as-is and utilities are off, the property condition often prevents the home from meeting FHA standards. Many buyers use cash or conventional financing instead. Have an agent and lender review the property before assuming FHA will work.
How long does closing take on a 24 CFR 206.125 property?
Cash closings typically take about 30 days. Financed deals require a minimum 60-day escrow period, and it can extend further if the title isn't clear. No extensions are guaranteed, so be sure your financing is lined up before making an offer.r
What does "sold as-is" actually mean under 24 CFR 206.125?
It means the seller — typically the lender or servicer — will make no repairs, pay no closing costs, credit no inspection findings, and won't turn utilities on. You can pay ~$100 to have utilities activated for your own inspection. Budget for potentially significant repair costs before making an offer.