The information below is courtesy of HUD
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If you are a homeowner age 62 or older and have paid off your mortgage or paid down a considerable amount, and are currently living in the home, you may participate in FHA’s Home Equity Conversion Mortgage (HECM) program. The HECM is FHA’s reverse mortgage program that enables you to withdraw a portion of your home’s equity.
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.
How the Program Works
There are many factors to consider before deciding whether a HECM is right for you. To aid in this process, you must meet with a HECM counselor to discuss program eligibility requirements, financial implications and alternatives to obtaining a HECM and repaying the loan. Counselors 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 specific needs. You can search online for a HECM counselor or call (800) 569-4287 toll-free.
Pros of Reverse Mortgage
- You can receive the funds in a lump-sum payment, monthly payments, as a line of credit or in a combination of these options
- You can stay in the home without making monthly mortgage payments
- Proceeds are tax-free
- Your heirs are not personally liable if payoff balance exceeds home value
- Your heirs inherit any remaining equity after paying off the reverse mortgage
Cons of a Reverse Mortgage
- HECM loan balance increases over time
- Value of estate inheritance may decrease over time as proceeds are spent
- Fees can be higher than a traditional mortgage
- Initial FHA Mortgage Insurance Premium
- Annual FHA Mortgage Insurance Premium
- Loan origination fee may be higher than traditional mortgages
- Although Social Security and Medicare eligibility are not affected by a reverse mortgage loan, needs-based government programs such as Medicaid can be affected.
There are borrower and property eligibility requirements that must be met. You can use the listing below to see if you qualify. If you meet the eligibility criteria, you can complete a reverse mortgage application by contacting a FHA-approved lender. You can search online for a FHA-approved lender or you can ask the HECM counselor to provide you with a listing. The lender will discuss other requirements of the HECM program, such as first year payment limitations, available payment options, the loan approval process, and repayment terms.
The following eligible property types must meet all FHA property standards and flood requirements:
For adjustable interest rate mortgages, you can select one of the following payment plans:
For fixed interest rate mortgages, you will receive the Single Disbursement Lump Sum payment plan.
Mortgage Amount Based On
The amount you may borrower will depend on:
If there is more than one borrower and no eligible non-borrowing spouse, the age of the youngest borrower is used to determine the amount you can borrow.
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 and charges, which includes: 1) mortgage insurance premiums (initial and annual) 2) third party charges 3) origination fee 4) interest and 5) servicing fees. The lender will discuss which fees and charges are mandatory.
You will be charged an initial mortgage insurance premium (MIP) at closing. The initial MIP will be .5 percent or 2.5 percent, depending on your disbursements. Over the life of the loan, you will be charged an annual MIP that equals 1.25% of the outstanding mortgage balance.
- Mortgage Insurance Premium
You will incur a cost for FHA mortgage insurance. The mortgage insurance guarantees that you will receive expected loan advances. You can finance the mortgage insurance premium (MIP) as part of your loan.
- Third Party Charges
Closing costs from third parties can include an appraisal, title search and insurance, surveys, inspections, recording fees, mortgage taxes, credit checks and other fees.
- Origination Fee
You will pay an origination fee to compensate the lender for processing your HECM loan. A lender can charge the greater of $2,500 or 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.
- 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 real estate taxes and hazard insurance premium. Lenders may charge a monthly servicing fee of no more than $30 if the loan has an annually adjusting interest rate or has a fixed interest rate. The lender may charge a monthly servicing fee of no more than $35 if the interest rate adjusts monthly. At loan closing, the lender sets aside the servicing fee and deducts the fee from your available funds. Each month the monthly servicing fee is added to your loan balance. Lenders may also choose to include the servicing fee in the mortgage interest rate.