Home Equity Conversion Mortgages

A Home Equity Conversion Mortgage (HECM) can be a good way for qualifying senior citizens to supplement their income, pay off debt or finance unexpected expenses so that they can live life to the fullest.

To be eligible for an HECM loan, seniors must own their home or have a good deal of equity in their home.An official HECM is a reverse mortgage insured by the United States Federal Government and is only available through lenders approved by and insured by the Federal Housing Administration (FHA).

Although an HECM reverse mortgage can be a good way for senior citizens to obtain extra income, home owners should carefully consider other options first. HECM counseling combined with getting advice from a trusted financial advisor can help uncover other options, such as downsizing into a smaller home or applying for a program that helps lower monthly bill payments. Review the following sections to learn about HECM loan eligibility requirements, how to find an HECM counselor and what costs are associated with a reverse mortgage.

HECM Eligibility Requirements

Eligibility requirements for a Home Equity Conversion Mortgage include separate requirements for the property and for the borrower. A property being considered for an HECM mortgage must fall into one of the following categories. The property can be:

  • A single family home
  • A two-to-four unit multi-family home with one of the units occupied by the borrower
  • A Housing and Urban Development (HUD) approved condominium project
  • A manufactured home that meets FHA requirements

Each HECM property must be appraised by an FHA appraisal expert and meet all FHA property standards. An appraiser will examine the HECM property to determine its condition and value, with health and safety being primary issues. This includes meeting all current flood requirements defined by FHA. In most cases, an FHA HECM loan cannot be approved until any problems listed on the appraisal are fixed.

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Borrower requirements for an HECM reverse mortgage are also specific. HECM program participants must:

  • Be 62 years of age, or older
  • Occupy the property as a primary residence
  • Own the HECM property outright or have paid down the mortgage significantly
  • Be current on any federal debts
  • Have enough financial resources to maintain regular payments on property charges, including insurance, property taxes and homeowner association fees
  • Complete a consumer information session hosted by an HUD-approved Home Equity Conversion Mortgage counselor

How to Obtain HECM Counseling

HECM mortgage applicants can find a local provider by searching on the HUD’s website. HECM mortgage, or reverse mortgage counselors, can provide counseling in person or over the phone. The HECM reverse mortgage counseling session is intended to help seniors and family members understand the process and make an informed decision. There is usually a fee for counseling that must be paid at the time of counseling. However, seniors facing financial hardship or whose income falls below 200 percent of the Federal Poverty Guidelines can delay the payment until the mortgage closing.

An HECM counselor will provide information about how reverse mortgages work, their benefits and drawbacks, taxes and other costs. He or she will also explain your options and payment requirements. After completing the counseling session, applicants receive an HECM certificate that lenders require before approving a reverse mortgage loan.

Home Equity Conversion Mortgage Payment Plans

Home Equity Conversion Mortgage payment plans vary according to the type of loan you receive. If you have a fixed-rate mortgage, you will usually receive the single disbursement lump sum payment plan. With this plan, you will receive your HECM mortgage proceeds and a large sum of money when the loan closes, but you will not receive additional proceeds later. Adjustable interest rate HECM mortgages offer one of the following payment plans:

  • Tenure: You pay equal monthly payments as long as at least one borrower is alive and continues to live in the property as a primary residence.
  • Term: You pay an equal monthly HECM payment for a fixed period of time.
  • Line of Credit: You will have unscheduled payments or pay in installments that you decide until the line of credit runs out.
  • Modified Tenure: This HECM reverse mortgage payment plan combines a line of credit with scheduled monthly payments as long as at least one borrower occupies the property.
  • Modified Term: The borrower chooses a fixed period of months to make monthly payments, combined with a line of credit.

Home Equity Conversion Mortgage Costs and Borrowing Limits

Various costs make up the total you will pay for an HECM loan. Most HECM borrowers will have the option of financing these costs and paying them with the proceeds from the loan. HEMC loan costs include a mortgage insurance premium. FHA HECM mortgage insurance and various third-party charges are part of the HECM costs. Third-party charges include the appraisal fee, inspection fees, recording and credit check fees. Mortgage taxes and title searches are also third-party charges.

Other HECM loan costs include an origination fee and a servicing fee. The origination fee pays the HECM lender for processing your loan. This fee is capped at $6,000 and the lender can charge $2,500 or two percent of the first $200,000 of your home’s value, plus one percent of the amount over $200,000—whichever is greater.

The HECM mortgage servicing fee covers costs of service provided through the life of the loan. These services include disbursing loan proceeds, sending account statements, and reminders to keep up with real estate taxes and insurance premiums. Lenders of HECM mortgages with a fixed interest rate or an annually adjusting interest rate may not charge more than $30 per month in servicing fees. HECM loans with an interest rate that adjusts monthly may only charge $35 each month in servicing fees.

The amount you may borrow with an HECM loan depends on several factors. First, the HECM mortgage amount is determined by the age of the youngest borrower or eligible non-borrowing spouse. If there is no eligible non-borrowing spouse, the age of the youngest borrower sets the limits on the amount of the loan.

In addition, the HECM property’s sales price and appraised value are determining factors. The amount of an reverse mortgage is also influenced by the current interest rate, and an HECM loan may not exceed $679,650 or the appraised value of the property, whichever is less.

FHA and HUD Home Equity Conversion Mortgage Programs

Participating in an FHA or HUD HECM program provides a layer of security for a lender who may be concerned that a borrower might stop making payments on the loan. When a bank or credit union creates an FHA HECM loan, the FHA promises to repay the lender if the borrower stops paying. Another advantage of an FHA HECM loan is that it requires lower minimum credit scores than other types of loans.

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