Use a reverse mortgage loan to purchase a home or for equity in your existing home. Learn about reverse mortgage loans and get HECM counseling before your apply for a loan.
A reverse mortgage is a type of mortgage loan that allows home loan applicants to borrow against the value of their home - also known as a Home Equity Conversion Mortgage or HECM. This type of home equity loan is only available to applicants who are 62yrs or older. The reverse mortgage was created by the Housing and Community Development Act of 1987 which allowed for the Federal mortgage insurance needed to insure home equity conversion loans. While the U.S. Department of Housing and Urban Development (HUD) administers reverse mortgages, all approved FHA mortgage lenders and their local mortgage brokers are authorized to assist HECM applicants with getting a reverse mortgage.
It is important to understand the acronym HECM to understand how the reverse mortgage works. The Home Equity Conversion Loan(HECM) converts home equity into monthly income or a credit line. This allows elderly homeowners to convert their home’s equity into a liquid asset without requiring a monthly payment in return. Instead, the opposite occurs with a HECM, a borrower can choose the way the equity is dispersed. A homeowner using a reverse mortgage loan can receive a lump sum payment, monthly disbursements, or other means of home equity conversion.
Commonly, a mortgage loan is paid back in monthly installments and is referred to as a forward loan. A HECM is different than traditional mortgage financing because a one-time payment is made to the mortgage lender once the home is no longer the borrower’s primary residence. Therefore, it is referred to as a reverse mortgage. The change in residency status could be from the sale of the home, a change of primary residence, or at the time of death.
Since no HECM loan payment is due during the time the borrower occupies the home as a principal residence, there is no set maturity date on the reverse mortgage loan. As a non-recourse loan, the HECM borrower will never owe more than the property value of the home or reverse mortgage loan balance, whichever is less.
HECM loan payments are secured by a mortgage loan against the subject property. If a homeowner chooses to receive monthly payments as a form of income from the reverse mortgage loan, the lender is committed to continuing the payments to the borrower without a maturity date. HUD guarantees payments to the homeowner if the lender is unable to continue making the payment to the borrower. The mortgage lender recovers the cost of the payments when the borrower no longer occupies the property as a primary residence.
A HECM loan allows a borrower to convert home equity into a liquid asset while deferring payment for an undetermined time. The principal amount a homeowner can borrow is determined by the age of the youngest borrower and is called Loan-to-Value (LTV). The LTV is percentage of the home’s appraisal value. The qualifying amount is used to determine the borrower’s home equity payment. This figure can increase monthly for payment calculation. There are five options to convert the home’s equity into a payment to the borrower.
The reverse mortgage tenure payment option is a fixed payment amount for the remainder of the borrower’s life while they maintain the home as a primary, principal residence.
With the term payment option, the borrower decides on a set term and will receive fixed monthly payment for that term’s length of time.
Line of Credit
This form of HECM loan payment allows the borrower to draw on a predetermined line of credit at any time and at any amount within the line of credit limit.
The HECM modified tenure payment option is a hybrid of the tenure payment option with an additional amount of funds set aside in a line of credit account that the borrower can access at any time and at any amount within the line of credit limit.
Like the modified tenure payment option, the modified term option allows the borrower to select a fixed payment term with access to a line of credit that can be accessed anytime and for any amount within the line of credit’s loan limit.
These payment options are the discretion of the reverse mortgage borrower and cannot be chosen by the HECM lender. No payment to the HECM is required while the borrower occupies the property as a primary, principal residence.
Changing Payment Plan
The payment plan can be changed throughout the term of the loan. An increase in credit is possible when the new reverse mortgage balance does not exceed the principal limit. A cash advance could change a scheduled payment plan. An additional cash advance will change the available line of credit.
A borrower is not required to maintain an escrow account for property taxes and homeowner insurance. However, taxes and insurance can be accounted for with any of the revere mortgage payment options. In this situation, the lender is responsible for escrow payments. The appropriate amount of escrow payment will be deducted or withdrawn from the borrower’s equity and added to the reverse mortgage balance.
An important condition of the reverse mortgage is that the borrower must be 62yr or older. Plus, the non-borrowing spouse must also be 62yrs or older. The property must be an existing one-unit home and includes condominiums. It is ideal to own the property free-and-clear, or with enough equity to exceed any liens on the property. A state licensed loan officer can help determine the principal loan limit of the reverse mortgage.
Qualifying for a reverse mortgage is simple. HECM loans do not have credit score criteria. However, a HECM loan applicant can be denied for financing for delinquent Federal debt but can be considered if the debt becomes current through payment, a payment plan, or through any written agreement to satisfy to delinquency with Federal agency. Major delinquencies such as foreclosure or bankruptcy may require seasoning. Unsecured debts outside of defaults on Federal debt should not affect reverse mortgage approval. A mortgage loan application is required for proper credit analysis.
The reverse mortgage principal limit will determine payment or loan amount. While credit score is not a factor, age will determine LTV and appraisal value will determine dollar amount. The Expected Average Mortgage Interest Rate or Expected Rate is used to calculate the monthly payment made to the HECM loan borrower. The expected rate does not change with a fixed rate reverse mortgage. With an Adjustable-Rate Mortgage (ARM) reverse mortgage loan, the expected rate is the total of the HECM lender’s margin plus the 10yr U.S. Treasury Rate. An ARM with a reverse mortgage allows for growth of the borrower’s credit line. Monthly increases of the principal limit are 1/12th of the total of the expected rate and 0.5% MIP.
The subject property value is critical in determining the principal loan amount and the repayment of the reverse mortgage. Therefore, a HECM loan will require a property appraisal. Some factors in determining property value are the condition of the home and the neighborhood and surrounding area. Any needed repairs will be noted on the appraisal report.
An appraiser will determine any repairs needed on existing properties so that the property meets a minimum qualify that is acceptable by HUD. The cost of repairs will be noted by the appraiser if the appraiser is able to properly evaluate the scope of required work. Otherwise, repair cost estimates beyond the capacity of the appraiser will require a property inspection report.
Reverse Mortgage Property Types
Only one-unit properties allowed with HECM loans. The designation must be confirmed on the property appraisal report. Factors that are considered when determining one-unit independence to ensure self-supporting units are personal kitchens, bathrooms, unit specific entrances, and an individual legal address. It is important to note that a sharing a common wall may not be the same as sharing a property and may not disqualify the homeowner form qualifying for a reverse mortgage.
Condominiums must be part of a HUD approved project to be considered for a HECM loan. HUD offers a list of approved condominium projects and instructions on how a condominium can become an approved condominium. The same applies for Planned Unit Development (PUD) properties. Cooperative housing developments are excluded from the HECM program. Any property with a lease must have a term no less than 99 years remaining with the option to renew, or 50 years remaining beyond the youngest borrower’s 100th birthday.
Manufactured homes are eligible for HECM financing under certain conditions. First, the home must be greater that 400sqft. Manufactured homes have the Federal Manufactured Home and Safety Standards seal. This requirement will exclude any home manufactured prior to June 15th, 1976 from participating in a reverse mortgage. In addition, the manufactured home must be recorded and taxed as real estate. Therefore, the home could not have been located and occupied at a prior location.
Any homeowner looking to apply for a HECM loan must have a HECM counseling certificate prior to loan starting any part of the reverse mortgage process that is an out-of-pocket expense to the borrower. HECM counseling is required by law and must received from a HUD approved counseling company. The counseling will cover alternative options outside of the reverse mortgage for the homeowner to consider prior to deciding on the reverse mortgage. It will also cover important financial factors and tax implications associated with the HECM loan. Aside from helping the borrower understand the options and benefits of the reverse mortgage, the HECM certificate will detail the responsibilities of the mortgage lender and HUD’s role in the reverse mortgage transaction.
The HECM lender will provide the borrower with a list HUD approved counselors. When possible, counseling should be in-person, and the counseling is open to all interested in how the reverse mortgage impact the borrower. To ensure interactive participation and better understanding of the reverse mortgage, the counseling can be conducted at the borrower’s home. It is important to know the counseling certificate can be obtain by a person with power of attorney, or by a person appointed by the court.
HECM loan applicants are allowed to finance all closing costs with a limit to lender origination fees. Financing reverse mortgage closing costs add to the principal loan amount and can have an impact on your available funds. Be sure to work with a wholesale mortgage broker such as Competitive Home Lending to ensure you are avoiding added retail mortgage fees that could reduce your equity payment or add to your out-of-pocket reverse mortgage expenses. We work with the nation's best mortgage lenders to offer mortgage loan products at a wholesale price.
HUD requires the subject property to be maintained by the borrower to an acceptable standard. The homeowner will receive notice if HUD is made knowledgeable of the decline in condition of the subject property. It is the borrower’s responsibility to return the property to a satisfactory condition. HUD requires compliance within 60-days. Failure by the borrower could result in a request for mortgage payment.
Aside from being responsible for property taxes and insurance, the reverse mortgage borrower is responsible for maintaining the condition of the property to a standard acceptable to HUD. Property damage beyond the capacity of insurance coverage must still be repaired. HUD must receive repair estimates. The borrower’s remaining principal limit can be utilized for the repairs, or the property can be sold as-is. If the borrower’s principal limit is exhausted and the property is inhabitable, HUD will issue a Repayment Notice and proceed with foreclosure if the property cannot be sold.
Property Taxes and/or Homeowner Insurance Default
Defaulting on property taxes or homeowner insurance will force HUD to make payment accommodations on behalf of the borrower. Tax and insurance payments will be drawn from the borrower’s line of credit. Otherwise, the borrower’s payment plan will be adjusted to account for the failed payments. Monthly amounts can be withheld from the payments to the borrower if taxes and insurance payments continue to default.
It is best for borrowers struggling with default to keep in close contact with HUD and the HUD-approved counseling agency to ensure responsible borrowing against a principal residence.