How Do FHA's Reverse Mortgages Work Anyway? From Christopher Shearer

Christopher Shearer

Reverse Mortgages for Seniors - FHA's Home Equity Conversion Mortgage (HECM)

 

Looking for housing options for yourself, an aging parent, relative, or friend? A reverse mortgage may be right for your situation.

The loan, commonly known as Home Equity Conversion Mortgage or HECM, is with a lending institution such as a mortgage lender, bank, credit union or savings and loan association. Senior homeowners age 62 and older can use FHA-insured reverse mortgages to convert the equity in their homes into monthly streams of income and/or a line of credit to be repaid when they no longer occupy the homes. Homeowners are required to receive consumer education and counseling by a HUD-Approved counselor so they can be sure this program meets their needs.

HECM counselors will discuss program eligibility, financial implications and alternatives to obtaining a HECM plus provisions for the mortgage becoming due and payable. Upon the completion of HECM counseling, you should be able to make an independent, informed decision of whether this product will meet your needs.

You can use a reverse Mortgage Calculator to help you see if you qualify. Homeowners who meet the eligibility criteria can complete a reverse mortgage application. Search for a FHA-approved HECM lender or request a listing of FHA-approved lenders from the HECM counselor.

Borrower Requirements:

• Must be age 62 years or older,
• Own your property outright or have a small mortage balance,
• Live in your property as primary residence,
• Not be delinquent on any federal debt, and 
• Participate in a consumer information session with a HUD-approved HECM counselor.

Mortgage Amount Based On:

• Age of the youngest borrower.
• Current interest rate.
• Lesser of the appraised value or the HECM FHA mortgage limit.

Financial Requirements:

• No income or credit qualifications are required of the borrower.
• No repayment as long as the property is the primary residence.
• Closing costs may be financed into the mortgage.

Property Requirements:

• Single family home or 2-to 4-unit home with one unit occupied by the borrower (which can also be FHA-approved condominiums or manufactured homes and leased land).
• Meet FHA property standards and flood requirements.

How FHA's Reverse Mortgage Program Works

Homeowners 62 and older who have paid off their mortgages or have only small mortgage balances remaining, and are currently living in the home, are eligible to participate in FHA's reverse mortgage program. The program allows homeowners to borrow against the equity in their homes. Homeowners can select from five payment plans:

• Tenure - equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.
• Term - equal monthly payments for a fixed period of months selected.
• Line of Credit - unscheduled payments or in installments, at times and amounts of borrower's choosing until the line of credit is exhausted.
• Modified Tenure - combination of line of credit with monthly payments for as long as the borrower remains in the home.
• Modified Term - combination of line of credit with monthly payments for a fixed period of months selected by the borrower.

Homeowners whose circumstances change may be able to restructure their payment options for a nominal fee of $20. Please consult your lender for more information.

Unlike ordinary home equity loans, an FHA-insured reverse mortgage does not require repayment as long as the home is the borrower's principal residence. Lenders recover principal, plus interest, when the home is sold. If any home equity remains after sale, the remaining value of the home goes to the homeowner, estate or heirs. You can never owe more than your home's value when sold.

If the sales proceeds are insufficient to pay the amount owed, HUD will pay the lender the amount of the shortfall. The Federal Housing Administration (FHA) collects an insurance premium from all borrowers to provide this coverage.

The amount you can borrow depends on your age, the current interest rate, other loan fees, and the appraised value of your home or FHA's HECM mortgage limit for your area, whichever is less. Generally, the more valuable your home is, the older you are, and the lower the interest, the more you can borrow. If there is more than one owner, the age of the youngest owner is used to determine the amount you can borrow. For an estimate of HECM cash benefits based on your age, home value, and current interest rate, go to the online calculator.

For example, based on a loan with interest rates of approximately 9%, and a home qualifying for $100,000, a 65-year-old could borrow up to 34% of the home's value; a 75-year-old could borrow up to 47% of the home's value; and, an 85-year-old could borrow up to 64% of the home's value. The percentages do not include closing costs because these charges vary.

There are no asset or income limitations in order for you to be eligible for a HECM. In addition, there is no limit on the value of homes qualifying for a HECM. The value of your home will be determined by an appraisal. However, the amount that you may borrow is derived from the lower of the appraised value or the FHA HECM mortgage limit for your area. Under the American Recovery and Reinvestment Act of 2009 (ARRA), the national FHA loan limit for HECM increased from $417,000 to $625,500 (from 100 percent to 150 percent of the conforming limit). The change in loan limits is applicable to all FHA-insured mortgage loans originated until December 31, 2009. You are charged an upfront insurance premium of 2 percent of the maximum claim amount that may be borrowed plus a 0.5 percent annual premium.

 

HECM Costs

You can pay for most of the costs of a HECM by financing them and having them paid from the proceeds of the loan. Financing the costs means that you do not have to pay for them out of your pocket. On the other hand, financing the costs reduces the net loan amount available to you.

The HECM loan includes several fees, including an origination fee, closing costs, mortgage insurance premium, interest and servicing fees.

Origination Fee

You will pay an origination fee to compensate the lender for processing your HECM loan. A lender can charge a HECM origination fee up to $2,500 if your home is valued at less than $125,000. If your home is valued at more than $125,000 lenders can charge 2% of the first $200,000 of your home's value plus 1% of the amount over $200,000. HECM origination fees are capped at $6,000.

Closing Costs

Closing costs from third parties can include an appraisal, title search and insurance, surveys, inspections, recording fees, mortgage taxes, credit checks and other fees.

Mortgage Insurance Premium (MIP)

You will incur a cost for HECM insurance. You can finance the mortgage insurance premium (MIP) as part of your loan. You will be charged an upfront MIP at closing which will be 2% of the lesser of your home's value or the FHA HECM mortgage limit for your area. You will also be charged a monthly MIP that equals 0.5% of the mortgage balance.

The HECM insurance guarantees that you will receive expected loan advances and that you will not have to repay the loan for as long as you live in your home. The insurance also guarantees that, if you or your heirs sell your home to repay the loan, your total debt can never be greater than the value of your home.

Servicing Fee

Lenders or their agents provide servicing throughout the life of the HECM. Servicing includes sending you account statements, disbursing loan proceeds and making certain that you keep up with loan requirements such as paying taxes and insurance. HECM lenders may charge a monthly servicing fee of no more than $30 if the loan has an annually adjusting interest rate and $35 if the interest rate adjusts monthly. At loan origination, HECM lenders set aside the servicing fee and deduct the fee from your available funds. Each month the monthly servicing fee is added to your loan balance.

Interest Rate

HECM borrowers can choose an adjustable interest rate or a fixed rate. If you choose an adjustable interest rate, you may choose to have the interest rate adjust monthly or annually. Lenders may not adjust annually adjusted HECMs by more than 2 percentage points per year and not by more than 5 total percentage points over the life of the loan. FHA does not require interest rate caps on monthly adjusted HECMs.

Repaying a HECM

A HECM loan must be repaid in full when you die or sell the home. The loan also becomes due and payable if:

• You do not pay property taxes or hazard insurance or violate other obligations.
• You permanently move to a new principal residence.
• You, or the last borrower, fail to live in the home for 12 months in a row. An example of this situation would be if you (or the last borrower) were to have a 12-month or longer stay in a nursing home.
• You allow the property to deteriorate and do not make necessary repairs.

 

Need answers to other Questions about FHA-insured Reverse Mortgages (HECMs)? 

 

 

 

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