[:en]Home Equity Conversion Mortgage (HECM) Loans
A Home Equity Conversion Mortgage (HECM), commonly known as a reverse mortgage, is a Federal Housing Administration (FHA) insured loan. HECM loans have helped more than one million Americans¹ nationwide access their home equity to find greater security in retirement. The loan can be used in a number of ways, many of which are focused on assisting adults in achieving their financial goals so that they can enjoy retirement. The HECM loan has been improved over the years so that it can better meet the needs of older adults. Today, there are important safeguards in place to ensure that it can continue to help consumers for years to come.
How does it work?
With a traditional HECM loan, borrowers can access their home equity and defer payment of principal and interest, so long as they continue to comply with loan terms.
The HECM, also known as a “reverse mortgage”, is unlike a traditional loan where the borrower makes payments to the lender. With the HECM loan, the lender makes payments to the borrower and the loan is typically repaid when the last borrower or eligible non-borrowing spouse passes away or leaves the house.
This federally-insured loan offers multiple ways to receive the proceeds and gives you the ability to spend the cash as needed. Common uses of Reverse Mortgage loans include:
- Converting your home’s equity into monthly payments to supplement income and maintain your standard of living in retirement.
- Using the monthly or lump sum payments from a reverse mortgage loan or the proceeds from a refinance loan to supplement your social security and other income without tapping into your investment portfolio.
- Getting rid of your monthly mortgage payment² and finance renovations so your home continues to meet your needs. (Borrower must continue to pay property taxes, homeowner’s insurance, and maintain the home.)
- Using a Reverse for Purchase to buy a new house that fulfills all your retirement needs without a monthly mortgage payment².
- Establishing a standby HECM line of credit that will grow over time and help cover you.
- Eliminating your monthly mortgage payments2 and access cash so you can afford to enjoy the next phase of life.
Important features of a HECM loan include:
- You must complete HECM counseling with an independent counseling agency.
- You must undergo a financial assessment to ensure you are able to meet the financial obligations of the loan, which includes the ability to pay your property taxes and homeowners insurance.
- If your spouse is younger than 62, they can qualify as an eligible non-borrowing spouse and remain in the home even if you leave or pass away, so long as they continue to meet all loan obligations ³.
*You cannot lose your home under normal circumstances and so long as you pay your property taxes, homeowner’s insurance, maintenance costs and otherwise comply with the loan terms.
- You must be at least 62 years old.
- You must own your home.
- The home must be your primary residence.
¹Annual HECM Endorsement Chart. NRMLA. https://www.nrmlaonline.org/2018/09/19/annual-hecm-endorsementchart. August 2018.
²Borrower must continue to pay property taxes and homeowner’s insurance, maintain the home, and otherwise comply with the loan terms.
³If you qualify and your loan is approved, a HECM Reverse Mortgage must pay off your existing mortgage(s). With a HECM Reverse Mortgage, no monthly mortgage payment is required. Borrowers are responsible for paying property taxes and homeowner’s insurance (which may be substantial). We do not establish an escrow account for disbursements of these payments. A set-aside account can be set up to pay taxes and insurance and may be required in some cases. Borrowers must also occupy home as primary residence and pay for ongoing maintenance; otherwise the loan becomes due and payable. The loan becomes due and payable when the last borrower, or eligible non-borrowing surviving spouse, dies, sells the home, permanently moves out, or defaults on taxes and insurance payments, or does not comply with loan terms. Call 1-800-898-2108 to learn more. A Reverse Mortgage increases the principal mortgage loan amount and decreases home equity (it is a negative amortization loan). These materials are not from HUD or FHA and were not approved by HUD or a government agency.[:es]THE HOME EQUITY CONVERSION MORTGAGE (HECM) IS FHA’S REVERSE MORTGAGE PROGRAM, WHICH ENABLES YOU TO WITHDRAW SOME OF THE EQUITY IN YOUR HOME. THE HECM IS A SAFE PLAN THAT CAN GIVE OLDER AMERICANS GREATER FINANCIAL SECURITY. MANY SENIORS USE IT TO SUPPLEMENT SOCIAL SECURITY, MEET UNEXPECTED MEDICAL EXPENSES, MAKE HOME IMPROVEMENTS AND MORE.
REVERSE MORTGAGE GUIDELINES & BENEFITS
You must be at least 62 years of age to qualify for a reverse mortgage.
- What is a reverse mortgage?
A reverse mortgage is a special type of home loan that lets you convert a portion of the equity in your home into cash. The equity that you built up over years of making mortgage payments can be paid to you. However, unlike a traditional home equity loan or second mortgage, HECM borrowers do not have to repay the HECM loan until the borrowers no longer use the home as their principal residence or fail to meet the obligations of the mortgage. You can also use a HECM to purchase a primary residence if you are able to use cash on hand to pay the difference between the HECM proceeds and the sales price plus closing costs for the property you are purchasing.
- Can I qualify for FHA’s HECM reverse mortgage?
To be eligible for a FHA HECM, the FHA requires that you be a homeowner 62 years of age or older, own your home outright, or have a low mortgage balance that can be paid off at closing with proceeds from the reverse loan, have the financial resources to pay ongoing property charges including taxes and insurance, and you must live in the home. You are also required to receive consumer information free or at very low cost from a HECM counselor prior to obtaining the loan. You can find a HECM counselor online or by phoning (800) 569-4287.
- Can I apply for a HECM even if I did not buy my present house with FHA mortgage insurance?
Yes. You may apply for a HECM regardless of whether or not you purchased your home with an FHA-insured mortgage.
- What types of homes are eligible?
To be eligible for the FHA HECM, your home must be a single-family home or a 2-4-unit home with one unit occupied by the borrower. HUD-approved condominiums and manufactured homes that meet FHA requirements are also eligible.
- What are the differences between a reverse mortgage and a home equity loan?
With a second mortgage, or a home equity line of credit, borrowers must make monthly payments on the principal and interest. A reverse mortgage is different, because it pays you – there are no monthly principal and interest payments. With a reverse mortgage, you are required to pay real estate taxes, utilities, and hazard and flood insurance premiums.
- Will we have an estate that we can leave to heirs?
When the home is sold or no longer used as a primary residence, the cash, interest, and other HECM finance charges must be repaid. All proceeds beyond the amount owed belong to your spouse or estate. This means any remaining equity can be transferred to heirs. No debt is passed along to the estate or heirs.
- How much money can I get from my home?
The amount varies by borrower and depends on:
- Age of the youngest borrower or eligible non-borrowing spouse
- Current interest rate; and
- Lesser of appraised value or the HECM FHA mortgage limit of $625,500 or the sales price
If there is more than one borrower and no eligible non-borrowing spouse, the age of the youngest borrower is used to determine the amount you can borrow.
- Should I use an estate planning service to find a reverse mortgage lender?
FHA does NOT recommend using any service that charges a fee for referring a borrower to an FHA-approved lender. Services rendered by HECM counselors are free or at a low cost. To locate a HECM counselor Search online or call (800) 569-4287 toll-free, for the name and location of a HUD-approved housing counseling agency near you
- How do I receive my payments?
For adjustable interest rate mortgages, you can select one of the following 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 an amount of your choosing until the line of credit is exhausted.
- Modified Tenure– combination of line of credit and scheduled monthly payments for as long as you remain in the home.
- Modified Term– combination of line of credit plus monthly payments for a fixed period of months selected by the borrower.
For fixed interest rate mortgages, you will receive the Single Disbursement Lump Sum payment plan.
- Single Disbursement Lump Sum – a single lump sum disbursement at mortgage closing.
- What if I change my mind and no longer want the loan after I go to closing? How do I do this?
By law, you have three calendar days to change your mind and cancel the loan. This is called a three day right of rescission. The process of canceling the loan should be explained at loan closing. Be sure to ask the lender for instructions on this process. Mortgage lenders differ in the process of canceling a loan. You should ask for the names of the appropriate people, phone numbers, fax numbers, addresses, or written instructions on whatever process the company has in place. In most cases, the right of rescission will not be applicable to HECM for purchase transactions.