A Home Equity Conversion Mortgage (HECM) refers to a reverse mortgage loan for homeowners 62 years of age or older that is insured by the Federal Housing Adminstration (FHA).1 Since 1990 there have been more than 1 million HECM reverse mortgages issued.2 The HECM loan program contains special requirements like HUD counseling and a property value ceiling. The HECM property value ceiling is currently at $726,525. This means that if the home is appraised for more, the loan amount will be based on the $726,525 value.
If you are looking for ways to supplement your retirement income, are 62 years or older and have significant equity in your home, you may be eligible for a HECM. A HECM allows eligible homeowners to access a portion of the equity that they have built up in their home. The funds accessed through a HECM can be used however the borrower chooses, from paying off medical bills to updating their home. A HECM can be a helpful financial tool for those who are eligible. In addition to being at least 62 years old and having sufficient equity, some additional key eligibility requirements include:
- An eligible property type: a single family residence, 2-to-4 unit owner-occupied dwelling, FHA-approved condominium, or manufactured home that meets FHA requirements.
- Occupying the home as your primary residence
- Not being delinquent on any federal debt
- Attending a session with a HUD-approved HECM counselor
- Meet financial eligibility criteria as established by HUD
The amount of funds available, also known as the Principal Limit, from a HECM loan is determined by:
- Age of the youngest borrower
- Current interest rates
- Balance of your existing mortgage, if applicable, and all mandatory obligations as defined by the HECM requirements
- The lesser of the appraised value of your home, sale price or the FHA maximum lending limit
The funds available to you may be restricted for the first 12 months after loan closing, due to HECM requirements.
With a fixed rate HECM loan, you can receive the cash in a lump sum. With an adjustable rate HECM loan, you can choose from the following disbursement options:
Tenure– Equal monthly payments that will continue as long as at least one borrower continues to occupy the property as their primary residence.
Term– Equal monthly payments that continue for a specified number of months.
Line of Credit– Unscheduled payments at times and in amounts specified by the borrower available until the line of credit is depleted.
Modified Tenure– A combination of a line of credit and scheduled monthly payments as long as at least one borrower continues to occupy the property as their primary residence.
Modified Term– A combination of a line of credit and scheduled monthly payments for a specified number of months.
Single Disbursement Lump Sum3– One payment at the closing of the loan.
Borrowers may access 60% of the principal limit amount or all mandatory obligations (whichever is greater), as defined by the HECM requirements, plus an additional 10% during the first 12 months after loan closing. The combined total of mandatory obligations plus 10% cannot exceed the principal limit amount established at loan closing.
As with most loans, there are fees associated with the loan that borrowers should be aware of. These fees include:
- Upfront Mortgage Insurance Premium (UFMIP)4
- Origination fee
- Third party charges such as appraisal, title insurance, etc.
- Interest which accrues over the life of the loan
- Servicing fees
- HUD counseling fee
A majority of the fees can be financed as part of the loan.
If you or someone you know may benefit from a HECM, call 800-966-7211 for more information and to see if you meet the eligibility requirements. A HECM may help you live more comfortably in the safety and security of your own home for many years to come.5
1As required by the Federal Housing Administation (FHA), you will be charged an initial mortgage insurance premium (MIP) at closing and, over the life of the loan, you will be charged an annual MIP based on the loan balance.
3This disbursement option is only available for a fixed rate loan.
4Upfront Mortgage Insurance Premium (UFMIP) is based on a percentage of the Max Claim Amount. The Max Claim Amount (MCA) is based on the lesser of your home’s value, the current maximum lending limit set by the Federal Housing Administration (FHA), or the purchase price (if purchasing a new home).
5You must live in the home as your primary residence, continue to pay required property taxes, homeowners insurance, and maintain the home according to FHA requirements. Failure to meet these requirements can trigger a loan default that may result in foreclosure.