What is a Home Equity Conversion Mortgage?
Home equity conversion mortgages (HECM), also called reverse mortgages, are becoming increasingly popular for seniors who have equity in their homes and would like to supplement their incomes. Home equity conversion mortgages are insured by the federal government, and they are only available through a Federal Housing Association (FHA) approved lender. Participants in the program, provided they meet established criteria, can withdraw a portion of their home’s equity.
This program, like other federal programs, is contingent upon several requirements. Eligibility criteria includes a series of borrower, property, and financial requirements.
Age, property ownership, debt status, and financial security are basic foundations for meeting borrower requirements. The FHA outlines the following criteria:
• Individuals may participate if they are age 62 or older
• Mortgages must be entirely or mostly paid off
• Seniors must be living in the homes that they own (this is an important consideration if you are planning a move to boomers community)
• Borrowers must not be delinquent on any federal debt
• They must demonstrate sufficient financial resources to make timely payments on mandatory expenses like property taxes, insurance, Homeowner Association fees, and more
• Once admitted to the program, borrowers are required to attend a consumer information session given by an accredited HUD HECM counselor
Before approving an individual into the program, the HUD requires homeowners of certain property types to meet certain criteria. In the following cases, property owners must ensure that the following structures meet all FHA property standards and flood requirements:
• The program participant must have a single-family or 2-4 unit multi-family home with one unit occupied by the borrower
• The property is an HUD-approved condominium complex
• The owner has a manufactured home that meets all FHA requirements
Program operators require program applicants to meet certain standards. Basic financial requirements include:
• Verification of income, assets, monthly living expenses, flood insurance premium verification, and hazard insurance premium verification
For adjustable interest rate mortgages, prospective program participants can choose from one of the program’s payment plans:
• Tenure. Tenure permits equal monthly payments provided the borrower currently lives in, and will continue to live in, the approved property as a primary residence
• Term. Term means that an individual can make payments for a fixed period of selected months
• Line of Credit. Line of credit allows unscheduled payments or payments in installations at the property owner’s discretion, until the time when his or her line of credit is depleted
• Modified Tenure. This payment method combines a line of credit and monthly payment scenario for the amount of time that an individual remains in his or her primary property
• Modified Term. Modified term lets the prospective property owner make payments based on a combination of line credit plus monthly payments for a pre-determined period.
For fixed interest rate mortgages, homeowners receive a Single Disbursement Lump Sum payment option. The amount that a homeowner may borrow depends on the following factors:
• Age of the youngest borrower in the household, or the age of an eligible non-borrowing spouse
• Current interest rate
• The lesser amount of the following values: appraised value, the HCM FHA mortgage limit of $636,150, or the sales price of the property as currently assessed
If the property’s ownership arrangement includes more than one borrower and does not have an eligible non-borrowing spouse, the amount of money that a person can borrow is determined by the age of the youngest borrower.
Most homeowners fund the cost of an HECM through financing arrangements, which are funded by proceeds of the loan. Financing costs reduces the risk of a loan by absolving participants of paying out of pocket. Instead, individuals who choose to finance their costs are granted an overall lower net load value.
Keep in mind that an HECM loan may require some or all of the following fees:
• Initial and annual mortgage insurance premiums
• Third party charges
• Origination fee
• Interest and servicing fees
Additionally, borrowers are responsible for paying an initial mortgage insurance premium (MIP) at closing time. This amount will be .5 percent or 2.5 percent depending on disbursements. The annual MIP amount will equal 1.25 percent of the outstanding mortgage balance.