If you or someone you know is considering retirement and is concerned about cash flow, a reverse mortgage may provide a solution. An HECM is a Home Equity Conversion Mortgage loan, a reverse mortgage program which allows homeowners aged 62 and older to borrow against the equity in their homes and convert it into cash.
Reverse mortgages do not require the borrower to make loan payments. Instead, the balance of the loan must be paid when the borrower moves away, sells the home, or passes away. The borrower continues to own the home and keeps the title. Over the life of the loan, the homeowner’s equity will decrease, and the debt will increase.
As with a traditional mortgage, the home is collateral for the loan. The proceeds of the property’s sale go to the lender to pay the loan balance when the borrower passes away or moves to another home. Several types of reverse mortgages are available. However, HECM loans are the only reverse mortgages federally insured by the Department of Housing and Urban Development. They are only available from FHA-approved lenders.
Qualifying for an HECM Loan
In order to qualify for an HECM loan, you must meet the following requirements.
- You must be 62 years old or older.
- You must own the property outright or have a large amount of equity.
- The property must be your principal residence.
- You must be able to pay ongoing expenses, such as homeowner’s insurance, property tax, and HOA fees.
- You must not delinquent on any federal debts.
Your income, credit history, assets, and monthly expenses will be verified during the application process. Timely payment of insurance premiums and real estate taxes will also be confirmed. Before you apply for an HECM loan, you’ll be required to meet with a HUD-approved financial counselor.
In addition to meeting the borrower requirements, the property must be eligible. Qualified properties include single-family homes, FHA-approved manufactured homes or condominiums, or 2-4 unit homes with the borrower occupying one unit. All property types must comply with FHA standards.
You can select one of several payment options for an HECM loan.
- A single lump sum (for a fixed-rate loan only).
- Term: a fixed monthly amount for a specific length of time.
- Tenure: a fixed monthly amount for as long as you remain living in the home.
- Line of credit: Allows you to draw amounts you choose at any time until you’ve used up the line of credit.
An HECM loan has several associated costs up front; it’s important to be aware of these expenses. You can pay for many of these costs by financing them with the proceeds of the loan; however, doing so will reduce the amount of cash available to you. The charges and fees include:
Mortgage Insurance Premiums
You’ll be required to pay for FHA mortgage insurance on your reverse mortgage. The premiums may be financed as part of your HECM loan.
Third-party closing costs may include appraisals, inspections, credit checks, recording fees, taxes, and other expenses. Speak with your mortgage lender and ensure you’re prepared to pay all necessary charges.
You’ll be required to pay an origination fee to the lender for processing your reverse mortgage. Lenders may charge “the greater of $2,500 or 2 percent of the first $200,000 of your home’s value plus 1 percent of the amount over $200,000.” The maximum origination fee is $6,000.
Lenders may charge service fees to maintain the loan. Servicing includes sending account statements, distributing loan proceeds and ensuring that loan requirements are met. The service fee is either added to the loan balance each month or included in the mortgage interest rate.
Is a Reverse Mortgage Right for You?
While a reverse mortgage can be a valuable tool in the right circumstances, it’s not without risk. If you cannot pay your homeowner’s insurance or property taxes, if you’re absent from the property for six months or more, or if you fail to satisfy other loan obligations, you may risk foreclosure. There are several important factors to consider before taking out an HECM loan.
Considerations for Spouses and Partners
Reverse mortgage loans must be paid back either when you pass away or when you move out of your home, no matter the reason. If you need to move in with a family member or into a nursing home due to health concerns, your reverse mortgage becomes due and payable.
If your spouse or partner is a co-borrower on the loan, they can remain in the home and continue to receive reverse mortgage funds as long as they meet the other loan requirements.
If your spouse is not a co-borrower, they will not receive the benefits of the loan after you pass away, and the reverse mortgage will need to be repaid. Your spouse will very likely need to sell the home in order to pay the loan back. However, your spouse may qualify for a deferral period if certain requirements are met:
- Your spouse has legal title to the home within 90 days of your death.
- You were married from the time of closing on the loan until your death.
- Your spouse was named in the loan documents as an Eligible Non-Borrowing Spouse.
- Since the beginning of the loan, the house was your spouse’s principal residence.
- Your spouse continues to meet the other requirements of the reverse mortgage loan, including paying property taxes and insurance.
Considerations for Your Heirs
After your death, your heirs will have thirty days from receiving a “due and payable” notice from your reverse mortgage lender to either sell the home, buy the property, or turn the property over to the lender. If your heirs wish to keep the home, they will need to pay 95 percent of the home’s appraised value, or the full loan balance, whichever is lower. If they sell the home, they will not need to pay more than the home is worth. If the loan balance is higher than the home’s value, the lender will collect the proceeds of the sale and FHA insurance will cover the rest of the loan balance.
Government Program Eligibility
Eligibility for some government assistance programs, such as Medicaid, is determined by an applicant’s income or their liquid assets. Money from a reverse mortgage may disqualify you from some government programs. Consult a financial professional before you sign a reverse mortgage contract and ensure a reverse mortgage won’t affect other income you receive.
A reverse mortgage is not right for everyone. Before you take out an HECM loan, make sure you fully understand the risks, the benefits, and the fine print.