FHA Reverse Mortgage, what the heck is HECM?

By
Mortgage and Lending with Guild Mortgage Co - Oak Harbor WA

So, what is a Reverse Mortgage? Maybe, a better, more specific question is: What the heck is a HECM?

Well, HECM stands for Home Equity Conversion Mortgage. It is a way for seniors to tap into the equity in their property without taking on payments that will cause them difficulty in the future.

The HECM FHA insured reverse mortgage can be used by senior homeowners age 62 and older to convert the equity in their home into monthly streams of income and/or a line of credit to be repaid when they no longer occupy the home.

Borrower Requirements:

 

Age 62 years of age or older

 

Own your property

 

Occupy your property as primary residence

 

Participation in a consumer information session given by an approved HECM counselor

Mortgage Amount Based On:

  

Age of the youngest borrower

 

Current interest rate

 

Lesser of appraised value or the FHA insurance limit for the county the property is located in

Financial Requirements:

 

No income or credit qualifications are required of the borrower  -- this can be especially helpful if the senior is behind or even in foreclosure on their current mortgage.

 

No repayment as long as the property is the primary residence

 

Closing costs may be financed in the mortgage

Property Requirements:

 

Single family home or 1-4 unit home with one unit occupied by the borrower

 

HUD-approved condominiums

 

Manufactured homes and leased land

 

Meet FHA property standards and flood requirements

How the Home Equity Conversion 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 HUD'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 in amount 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 can restructure their payment options for a nominal fee of $20.

Unlike ordinary home equity loans, a HUD reverse mortgage does not require repayment as long as the home is the borrower's principal residence. Lenders recover their principal, plus interest, when the home is sold. The remaining value of the home goes to the homeowner or to his or her survivors. You can never owe more than your home's value.

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

The amount a homeowner can borrow depends on their age, the current interest rate, other loan fees and the appraised value of their home or FHA 's mortgage limits for their area, whichever is less. Generally, the more valuable your home is, the older you are, the lower the interest, the more you can borrow.

For example, based on a loan with an interest rates of approximately 9 percent, and a home qualifying for $100,000, a 65-year-old could borrow up to 22 percent of the home's value; a 75-year-old could borrow up to 41 percent of the home's value; and, an 85-year-old could borrow up to 58 percent of the home's value. The percentages do not include closing costs because these charges can vary.

There are no asset or income limitations on borrowers receiving HUD's reverse mortgages.

There are also no limits on the value of homes qualifying for a HUD reverse mortgage. The value of the home will be determined by an appraisal. However, the amount that may be borrowed is derived from the lower of the appraisal amount or FHA mortgage limit for the area, which varies from $200,160 to $362,790. For Alaska, Guam, Hawaii and the Virgin Islands, the FHA mortgage limits may be adjusted up to 150 percent of the ceiling depending on the area. The FHA limits usually increase each year. As a result, owners of higher-priced homes can't borrow any more than owners of homes valued at the FHA limit.

HUD's reverse mortgage program collects funds from insurance premiums charged to the homeowners. Homeowners are charged an upfront insurance premium which is 2 percent of the maximum claim amount that may be borrowed plus a .5 percent annual premium.

Apparently, according to what I have been reading, HECM limits on total value of the home will change Jan. 1 and also allow purchase of a residence with a HECM loan.

AARP offers a loan calculator and you can link to it here. Just remember, this is an estimate of what you may receive through a HECM mortgage, it could vary substantially.

 Authored by Fred Chamberlin, a mortgage loan consultant, Eugene/Springfield Oregon

Comments (11)

Midori Miller
Talk 2 Midori, LLC - Daytona Beach, FL
Online Marketing For Real Estate Professionals

Fred-I heard this too one of the guys from Wells Fargo was in our office letting us know this is coming!  I find all of this interesting and I hope to learn more!

Nov 06, 2008 09:11 AM
John Cannata
214-728-0449 http://TexasLoanGuy.com - Frisco, TX
Texas Home Mortgage - Purchase or Refinance

I think this is a great product.  We have one person in our office that has worked Reverse Mortgages for a few years.  We just added two more people to host some seminars and share their knowledge of the product.

Nov 06, 2008 09:43 AM
Fred Chamberlin
Guild Mortgage Co - Oak Harbor WA - Oak Harbor, WA
Oak Harbor/Whidbeynulls, #1 Experienced FHA Mortgage Consultant

Midori - It will be nice to have the HECM for purchases. Guidelines should be coming soon.

Yes John, this is even something you can recommend for a relative without feeling bad.

Nov 06, 2008 10:07 AM
Midori Miller
Talk 2 Midori, LLC - Daytona Beach, FL
Online Marketing For Real Estate Professionals

Well Fred-I expect you to teach me! :)  OK, maybe expect is a strong word but I want you to share as much as you can.  I can understand your blogposts and truthfully many of the loan officers..write and talk over my head...and I thought I was a smart cookie..

Nov 06, 2008 11:21 AM
Thesa Chambers
West + Main - Bend, OR
Principal Broker - Licensed in Oregon

I just heard of these today - I can not figure out what the bank gets out of them

Nov 06, 2008 11:58 AM
Bo Hussung
Bell Title /Triserv LLC - Nashvle, TN

Fred, I was not aware you were working this market.....perhaps we should talk

Bo

Nov 06, 2008 12:38 PM
Fred Chamberlin
Guild Mortgage Co - Oak Harbor WA - Oak Harbor, WA
Oak Harbor/Whidbeynulls, #1 Experienced FHA Mortgage Consultant

Midori - You are a smart cookie. Just let me know what you don't understand about the product and I will see what I can do. It actually is pretty simple. The loan to value is determined by location and age of the borrower.

Thesa - This is a great product for a certain percentage of senior citizens. This a not a great deal for everyone, but many. The bank gets paid after the home is sold. There is never more owed on it than its value.

Bo - Give me a call. I really didn't think you were that old. :-D I have been mostly concentrating on the 203k and USDA programs, but I am a well rounded lender. Some may think I am very round...but am working on that.

Nov 06, 2008 12:55 PM
Leslie Stewart
Oregon Licensed Broker with Berkshire Hathaway HomeServices Real Estate Professionals - Stayton, OR
Realtor, ABR, CRS, Oregon Licensed Broker

Fred, This sounds like a good program.  I have a myth for you to bust; I was told that if a senior takes out a reverse mortgage and leaves the home, i.e has to go into a care home the bank can take back the home and the homeowner loses the equity. This is one reason I have been leary about recommending it to seniors. 

 

Nov 07, 2008 04:13 AM
Fred Chamberlin
Guild Mortgage Co - Oak Harbor WA - Oak Harbor, WA
Oak Harbor/Whidbeynulls, #1 Experienced FHA Mortgage Consultant

Leslie - The only way they lose the equity is if the heirs let the home go back to the bank, They will have sufficent time to sell or refinance the home if they wish to keep it after the life event that makes the loan come due. FYI, they only have to live in the home for 6 months out of the year.

Nov 07, 2008 05:23 AM
Valerie Springer
Benchmark Mortgage nmls 2143 - Birmingham, AL
Home Loan Officer AL, FHA, VA, Conventional and Re

Great post Fred, I do HECM Reverse Mortgage in Alabama.  Thank you for sharing this valuable information.

 

Jun 14, 2011 09:38 AM
Fred Chamberlin
Guild Mortgage Co - Oak Harbor WA - Oak Harbor, WA
Oak Harbor/Whidbeynulls, #1 Experienced FHA Mortgage Consultant

You are very welcome.

Jun 17, 2011 01:43 PM