The Home
Equity Conversion Mortgage (HECM) is FHA's reverse mortgage
program which enables you to withdraw some of the equity in
your home. You choose how you want to withdraw your funds,
whether in a fixed monthly amount or a line of credit or a
combination of both.
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.
HECM counselors will discuss program eligibility requirements,
financial implications and alternatives to obtaining a HECM.
They will also discuss provisions for the mortgage becoming due
and payable. Upon the completion of HECM counseling, you should
be able to make an independent, informed decision of whether
this product will meet your needs.
Borrower Requirements
You must:
- Be 62 years of age or older
- Own the property outright
or have a small mortgage balance
- Occupy the property
as your principal residence
- Not be delinquent on any
federal debt
- Participate 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 HECM FHA mortgage
limit
Financial Requirements
-
No income or credit qualifications are required of the
borrower
-
No repayment as long as the property is your principal
residence
-
Closing costs may be financed in the mortgage
Property Requirements
The following eligible property types must meet all FHA property
standards and flood requirements:
How the Program Works
If you are a homeowner age 62 or older and have paid off your
mortgage or have only a small mortgage balance remaining, and
are currently living in the home, you are eligible to participate
in FHA's reverse mortgage program. The program allows you to
borrow against the equity in your home. You 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 an amount of your choosing
until the line of credit is exhausted.
- Modified Tenure - combination of line
of credit plus 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.
You can change your payment options for a fee of $20.
Unlike ordinary home equity loans, a FHA reverse mortgage HECM
does not require repayment as long as the home is your principal
residence. Lenders recover their principal, plus interest,
when the home is sold. The remaining value of the home goes
to you or your heirs. You can never owe more than your home's
value.
If the sales proceeds are insufficient to pay the amount owed,
FHA will pay the lender the amount of the shortfall. FHA collects
an insurance premium from all borrowers to provide this coverage.
The amount you can borrow depends on your age, the current
interest rate, other loan fees, and the appraised value of
your home or FHA's HECM mortgage limit for your area, whichever
is less. Generally, the more valuable your home is, the older
you are, and the lower the interest, the more you can borrow.
If there is more than one owner, the age of the youngest owner
is used to determine the amount you can borrow.
There are no asset or income limitations in order for you to
be eligible for a HECM. In addition, there is no limit on the
value of homes qualifying for a HECM. The value of your home
will be determined by an appraisal. However, the amount that
you may borrow is derived from the lower of the appraised value
or the FHA HECM mortgage limit of $625,500. You are charged
an upfront insurance premium of 2 percent of the maximum claim
amount that may be borrowed plus a 0.5 percent annual premium.
HECM Costs
You can pay for most of the costs of a HECM by financing them
and having them paid from the proceeds of the loan. Financing
the costs means that you do not have to pay for them out of
your pocket. On the other hand, financing the costs reduces
the net loan amount available to you.
The HECM loan includes several fees, including an origination
fee, closing costs, mortgage insurance premium, interest and
servicing fees.
Origination Fee
You will pay an origination fee to compensate the lender for
processing your HECM loan. A lender can charge a HECM origination
fee up to $2,500 if your home is valued at less than $125,000.
If your home is valued at more than $125,000 lenders can charge
2% of the first $200,000 of your home's value plus 1% of the
amount over $200,000. HECM origination fees are capped at $6,000.
Closing Costs
Closing costs from third parties can include an appraisal,
title search and insurance, surveys, inspections, recording
fees, mortgage taxes, credit checks and other fees.
Mortgage Insurance Premium (MIP)
You will incur a cost for HECM insurance. You can finance the
mortgage insurance premium (MIP) as part of your loan. You
will be charged an upfront MIP at closing which will be 2%
of the lesser of your home's value or the FHA HECM mortgage
limit for your area. You will also be charged a monthly MIP
that equals 0.5% of the mortgage balance.
The HECM insurance guarantees that you will receive expected
loan advances and that you will not have to repay the loan
for as long as you live in your home. The insurance also guarantees
that, if you or your heirs sell your home to repay the loan,
your total debt can never be greater than the value of your
home.
Servicing Fee
Lenders or their agents provide servicing throughout the life
of the HECM. Servicing includes sending you account statements,
disbursing loan proceeds and making certain that you keep up
with loan requirements such as paying taxes and insurance.
HECM lenders may charge a monthly servicing fee of no more
than $30 if the loan has an annually adjusting interest rate
and $35 if the interest rate adjusts monthly. At loan origination,
HECM lenders set aside the servicing fee and deduct the fee
from your available funds. Each month the monthly servicing
fee is added to your loan balance.
Interest Rate
HECM borrowers can choose an adjustable interest rate or a
fixed rate. If you choose an adjustable interest rate, you
may choose to have the interest rate adjust monthly or annually.
Lenders may not adjust annually adjusted HECMs by more than
2 percentage points per year and not by more than 5 total percentage
points over the life of the loan. FHA does not require interest
rate caps on monthly adjusted HECMs.
Repaying a HECM
A HECM loan must be repaid in full when you die or sell the
home. The loan also becomes due and payable if:
- You do not pay property taxes or hazard insurance or violate
other obligations.
- You permanently move to a new principal residence.
- You, or the last borrower, fail to live in the home for
12 months in a row. An example of this situation would be
if you (or the last borrower) were to have a 12-month or
longer stay in a nursing home.
- You allow the property to deteriorate and do not make
necessary repairs.
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