A reverse mortgage is a type of mortgage that works in “reverse” of your regular forward type mortgage. With a regular mortgage, you pay it down with monthly or periodic payments of principal and interest. Eventually, you may pay it all off. With a reverse mortgage, the borrowers on title must be aged 62 or more, the mortgage may increase in size as you add interest and mortgage insurance that you decide not to pay down (you can opt to pay it down), and its balance outstanding may sometimes grow in excess of the value of your home, which must be your primary residence. It’s a regular mortgage. You own the home and any equity in the home.
With a Home Equity Conversion Mortgage (or HECM), which is a reverse mortgage insured and administered by the Federal government through the Department of Housing and Urban Development (HUD) and its sister entity the Federal Housing Authority (FHA), you may live in the home as long as you want. You can never be asked to leave your home provided you pay the property taxes, maintenance, and insurance. You or your estate can never be held liable should the home not be worth enough money to pay off the mortgage fully. Neither the lender or the government own your home. It’s always your home. Always in your name. If there is any equity in the home, it’s yours or your heirs.
The HECM is a government program established to help people “age in place” as they get older. HECMs allow seniors to access the equity they have built up in their homes but defer repayment (or make whatever repayments they wish) of any drawdowns, interest, and mortgage insurance on the HECM until they die, sell, or move out of the home.At any time, if you permanently leave the home, and there is no equity in the property, you can simply hand it back to the lender and walk away from any deficits.
The reverse mortgage is different in that it is not intuitively what you think of as a typical mortgage. HECMs have many features similar to a home equity line of credit (a HELOC).Some look like a regular mortgage, with an optional payment plan. Some look like an annuity. HECMs come, though, with far more protections. The HECM has a variety of disbursement options to suit every need.
Also since this is an FHA HECM, the government will guarantee that regardless of who your lender is or their financial condition, you will always have access to the funds available to you under the loan agreement.
The requirements are set by HUD, and include:
• All borrowers must be age 62 or older (this applies to all co-owners listed on the home’s title).
• The home must be your principal residence. And it must meet standards set by HUD on property type and condition. You may be able to use your reverse mortgage to pay for any required repairs in order to meet these standards.
• Eligible property types include single-family homes, 2- to 4-unit properties, manufactured homes meeting certain criteria, condominiums that are approved by the Federal Housing Administration (FHA), and townhouses. Co-ops do not qualify.
• You must have sufficient monthly income left over after living expenses (appropriate for your family size) to meet the ongoing property expenses such as property taxes, insurance, and maintenance. It’s a lower standard than a typical traditional forward mortgage or home equity loan.
• You must pass a Financial Assessment to evaluate your capacity and willingness to meet your financial obligations. You do not need a credit score. The assessment is primarily to ensure the HECM is a suitable financial product for your circumstances.
• You must be counseled by an approved HUD counselor.
Yes! The HECM must be repaid. Borrowers generally repay a HECM when they or their heirs sell the home. Regular monthly or periodic payments are not required on a HECM, but they can be made at the borrower’s option. A HECM can be paid off at any time, without penalty and can be refinanced with another reverse mortgage or traditional forward mortgage.
Yes! But always check with your tax advisor. You never know when tax conventions change.
No! After you pay off any obligations that must be satisfied as a condition to obtaining the HECM, such as an existing mortgage or delinquent Federal debt or closing costs, you may use the HECM any way you wish.
You can have the available proceeds paid to you as a lump sum, a line of credit, a monthly term payment, a tenure payment similar to an annuity, or a combination of a line of credit and a term or tenure payout.
Provided that the HECM approved is sufficiently large enough to pay off an existing mortgage and possibly other obligations attached to the home, and any delinquent Federal debt, having an existing mortgage is not an issue. HECMs are an excellent way to refinance an existing mortgage and obtain the ability to defer monthly payments and add to your retained monthly cash flow.
The other borrower continues to own and live in the home — and enjoy all the benefits of their HECM. All borrowers on title and on the HECM mortgage enjoy the same protections and privileges. Assuming all other terms of the HECM are met (like paying property tax and insurance) it is only upon the leaving of the home of the last borrower that the HECM is called Due and Payable.
HECMs are generally more expensive than traditional forward mortgages or Home Equity Loans/HELOCs. Why? Because the HECM affords you the option to never make another mortgage payment as long as you live in the house, protects you from any cross over risk (i.e. the home is worth less than the amounts owing or could be owed if all money drawn, on the HECM), leaves you and your heirs any remaining equity in the home, and guarantees the availability of your HECM funds regardless the financial condition of your lender. Virtually all of the costs associated with a reverse mortgage can be financed with your loan, so there’s no immediate out-of-pocket cost. The costs are added to the loan amount (“principal”) and paid along with the accrued interest when the loan becomes due. However you will have to pay the Counseling Fee, an Appraisal Fee and possibly a Credit Fee out of your own pocket initially, and if you fail to qualify, these costs are your out of pocket expenses and would not be reimbursed. If you fund the HECM, you can repay yourself these costs.
Depending on the loan option you choose, initial costs may include an origination fee, closing costs, and an Upfront Mortgage Insurance Premium (MIP) (required for HECM loans). There are available what are called “Lower-Cost HECM” pricing options, which eliminates nearly all origination and closing costs in exchange for a monthly service fee and/or a higher mortgage rate than normal.
Ongoing annual costs charged on the HECM outstanding balance include interest, mortgage insurance premiums (MIP), and if you selected a Lower Cost HECM, you may have a monthly service fee of between $15-$30.
The largest single cost can be the Upfront MIP. That fee will be 2.0% of the lower of the appraised value, sales price or Federal limit of $636,150, regardless what amount you may actually draw on the HECM. This MIP is paid to HUD, not the lender. It is the cost of the HECM features and HUD’s guarantees. Other closing costs are typical of a traditional mortgage loan.
Yes! You can. A HECM for Purchase is a product specially created for buying a new or existing home. It’s a terrific way for buyers age 62 and older to find their dream “age-in-place” home, and either upgrade using their current home’s equity or keep some of that equity for the future by using the HECM. The no mortgage payment option of the HECM makes a HECM for Purchase a very attractive alternative to a traditional forward mortgage.
The HECM is Due and Payable (i.e. a demand is made upon you or your heirs for repayment) upon a Maturity Event. A Maturity Event occurs when:
• All borrowers have passed away
• All borrowers have sold or conveyed title of the property to a third party
• The property is no longer the principal residence of at least one borrower for reasons other than death
• The borrower does not maintain the property as principal residence for a period exceeding 12 months because of physical or mental illness
• Borrower fails to pay property taxes or insurance and all attempts to rectify the situation have been exhausted.
• The property is in disrepair, and the borrower has refused or is unable to repair the property.
Non-Borrowing Spouses in certain circumstances do have protection and a Due and Payable may be deferred. Children or other people living in the home do not have protection.
With the growing number of homeowners choosing a HECM, many are also concerned about the impact of this option on their eligibility for Social Security, Medicaid, or Medicare. A HECM does not affect the homeowner’s Medicare or Social Security coverage. However, if you have Medicaid, this might be a little more complicated.
Medicare is the medical coverage automatically provided for seniors over 65, while Medicaid is the health insurance for low-income individuals. If you are on Medicaid and are looking to qualify for a HECM, a large sum of money could change your eligibility for the medical assistance.
Individuals who have liquid resources over $2,000 or couples that have liquid funds over $3,000 would no longer be eligible for Medicaid. Receiving your HECM payment in one lump sum is helpful if you can spend it all at once so that no money is left over for future months (such as using all funds to simply payoff the existing mortgage or cover extensive repairs or household emergencies. Unused HECM proceeds would count as an asset, and may push you over the Medicaid eligibility limit.
If you cannot spend the entire lump sum at once, then it may be better for you to receive your HECM as a line of credit or in payments. A line of credit is a lump sum that has been set aside for you. You have full access to it, but it’s not counted as an asset because you don’t have the money until you withdraw it.
It’s important to check with your local Agency on Aging or a Medicaid expert to know your options. While HECMs are an excellent way to relieve financial stress, there’s also no reason why you should lose medical coverage to pay for other necessities in life. Keep in mind that it is entirely possible to qualify for a HECM, and also keep your Medicaid eligibility.
For homeowners with Medicare and Social Security, there are no financial eligibility requirements that prevent you from obtaining a HECM.
Most borrowers take a simple line of credit to have for emergency funds or help with daily expenses. But many borrowers also us a HECM for the reasons below:
a. Pay an existing mortgage off.
b. Create a monthly annuity payment.
c. Refinance an amortizing HELOC.
d. Buy a new, more “age-in-place” appropriate, home with a HECM for Purchase.
e. Finance Long-term Care (LTC) Health Insurance.
f. Protect existing investments.
g. Buy a 2nd home using HECM for Refinance on Primary residence.
h. Create tax planning strategies.
i. Smooth out seasonal or part-time income.
j. Use to facilitate or finance a divorce.
k. Make a charitable contribution instead using a Charitable Gift Annuities.
A lender will appraise your residence. The value that will be used will be the lesser of the sales price (if being purchased), $636,150 (the Federal Loan Limit) or its actual appraised value. It must be your primary residence.
Based on the age of the youngest borrower aged 62 or older on title (or if a spouse not on title, and younger than 62, then we use his/her age), the lender calculates the estimated remaining years the borrower(s) might remain in the home.
Using this period of time estimate, the lender calculates the amount of money to be made available to the borrower(s) using either (a) for a Fixed Rate HECM, the actual fixed interest rate chosen on the HECM, or (b) for a Variable Rate HECM, the actual margin selected added to the 10 Year LIBOR swap Interest Rate, so that when all the mortgage interest and MIP (of annual 0.50%) is added to the money borrowed over the years estimated, the total will equal the original appraised value, plus (in some cases and options) some small estimate for the increasing real estate value over time. Note that the interest rates used here are what we call the FHA Expected Rate, and NOT necessarily what you might be charged on the loan, through time. This Expected Rate is FHA’s best estimate of interest cost over life of loan (using 10 years in the future as an estimate, or just the fixed rate, since this rate cannot change).
Let’s make a simple example. Assume the youngest borrower is aged 75. And the house is worth $400,000. According to the FHA, assuming an interest rate of 4.5% qualifying (or FHA Expected Rate) at 75 years of age, the estimated remaining life of a person is 12 years. Per the FHA the borrowers get 51.9% (based on October 2nd, 2017 tables) of that appraised value, or $207,600.
If the borrower were 90 years old, FHA would permit a 67.2% advance of the $400,000 appraised value. Why? Because a person aged 90 has a smaller remaining expected life and will, therefore, use less of the home value in accruing unpaid interest and MIP. So, more of the home value is available to older borrowers.
Borrower(s) do not have to repay the HECM during their lifetime. They can opt not to make any repayments, and let their heirs (if there is remaining equity in the home), or the lender (if no equity left) sell the home to fully satisfy the HECM. But they must pay the home’s taxes and insurance and make mandatory repairs while they occupy the home. If they do not, they face foreclosure.
If the HECM you took is a variable rate open-end credit (like a Home Equity Line of Credit (HELOC)), any repayments a borrower makes against the outstanding balance may be re-borrowed. And if you make partial or full repayments on any HECM, there are no prepayment penalties.
FHAeligible property consisting of:
1. 1-4 unit home
2. Possibly a manufactured home constructed after 1976. However, due to collateral value issues, not all lenders accept manufactured homes.
3. Condominiums approved by the Department of Housing and Urban Development (HUD)
4. Co-operatives on a case by case basis.In general, co-ops are not acceptable collateral.
5. If using a HECM for Purchase product, the home must have a completed Certificate of Occupancy.
If you have questions regarding your property and whether it is eligible, discuss them with your HUD-approved counselor before paying for an appraisal.
You must be 62 years or older. All borrowers on property title and the HECM must also be 62 years or older.
And because a HECM must be, under the rules, a first position mortgage on your primary residence (and with some exceptions, FHA will not generally allow a debt to be subordinated to it), you must have sufficient equity in your home (based on the appraisal) to payoff existing mortgages or any delinquent Federal debt. The government doesn’t want to lend you money and give you certain guarantees if you are already delinquent with them. If the HECM you can qualify for is less than your existing mortgage and Federal debt then to get the loan, you have the option to bring cash into the closing to satisfy a remaining balance.
In addition, and critically, you need to have demonstrated both a capacity and a willingness to meet your previous and future mortgage obligations (including tax and insurance) and also other contractual payments (like a car loan). The lender completes a Financial Assessment to address these two elements.
So, underwriting a HECM requires an appraisal, validation of income or other resources that demonstrates you can reach the minimum income required, and a review of your credit history to evaluate your desire to meet your obligations. Valuation. Capacity. Willingness.
And you must be counseled.
The Department of Housing and Urban Development (HUD) certifies housing counselors around the US to help homeowners with impartial education about HECMs. Counseling is a mandatory part of the HECM application process and is usually completed after submitting an initial application for a HECM to a lender.
Even though the application has been completed, the lender is not legally permitted to incur any costs on the applicant’s behalf (such as ordering the appraisal) until the borrower has submitted a signed HECM Counseling Certificate. This is proof that you have completed the mandatory counseling session with a HUD-approved counseling agency. The counseling can be completed before or after the initial application in most states. Counseling can be done over the phone, or it can be done face-to-face with a regional agency.
The loan application process cannot begin until counselingis completed and a fully executed counseling certificate is provided to the lender.
The cost of the counseling is an average $125 but varies. Lenders are not permitted to pay this fee for applicants. Homeowners can also contact the counseling agency to request a “hardship” approval to pay a reduced fee.
Loan originators are not permitted to direct you to a particular counselor or counseling agency. They are required by HUD to provide a list of counselors, including local agencies and national intermediaries who are selected by HUD to provide counseling by telephone across the country.
You should assume it will take possibly will take three to ten business days from the time you place the call to the counseling agency for the counseling to take place.
Before being counseled, you will receive an information packet from either the counseling agency or the lender, depending on who you contact first. This information packet will include the following materials:
• An informational document called “Preparing for Your Counseling Session”
A printout of loan comparisons, so the counselor may review what you are potentially eligible to receive from the HECM
• A printout of the Total Annual Loan Cost (TALC) Disclosure required by the Federal Reserve Board on all HECM transactions. This form illustrates the cost of the loan assuming it is outstanding for different durations of time.
• The National Council on Aging (NCOA) booklet, Use Your Home to Stay at Home – A Guide for Homeowners Who Need Help Now.
Counseling must be done before application in the following States – RI, TN, CA, and VT.
Personally, I recommend you are counseled before you find a lender. Even if independent, FHA Counselors still depend on lenders for referrals and since their business may depend on these referral, Counselors might be slow to turn away potential borrowers.
If you now owe any money on a debt against your home or any other Federal obligations, you would have to payoff those amounts to get a HECM.You could use money from the HECM to do that. Any remaining funds you can use as you wish. There are no restrictions. The proceeds from a HECM can be used for anything, whether it’s to supplement retirement income to cover daily living expenses, repair or modify your home (i.e., widening halls or installing a ramp), pay for health care, pay off existing debts, cover property taxes, or possibly prevent foreclosure.
• Counseling: You must be counseled by an independent financial counselor about the risks and benefits of taking a HECM before a lender can start to process your application. Like any financial product, if a HECM is not suitable for your circumstance, the result may be a great deal of stress and unhappiness. Very few products come with a counseling or educational requirement, but a HECM does.
• Right of Rescission: Provided you are not using the HECM to purchase a home, you have 3 days to re-evaluate your decision, and may if you wish cancel the entire transaction.
• No Monthly Repayment Option: You don’t have to make monthly payments (though you must always pay the taxes, insurance and property maintenance), so your credit cannot be impacted by not making a mortgage payment. However when you leave the home, or have another form of Maturity Event, you will have to repay the loan to the lender. Most borrowers or their estates, pay off the HECM through the sale of the home or, if no equity remaining in the home, give it back to the lender as full payment of the HECM.
• Partial Payments:If you partially repay any of a variable rateopen-ended HECM those repayments (not just of principal as in the case of a HELOC, but repayments or draws, interest and mortgage insurance) will increase the existing line of credit available to you.
• Own the Home: You own the home. It was not sold to the bank or the lender or the government. It’s your home.
• Age-in-Place: You can live in the home for as long as you want or are able.
• Non-Recourse Loan: If there is a loss on payoff, you (or your estate) can simply walk away.
• Retain Equity: If there is equity in the property, it’s still yours or your estate’s.
• Spousal Protection: If a spouse is on the title they are equally protected.
• Possible Tax Deductions: If you make payments you potential get the same tax deductions on interest and mortgage insurance you would have gotten with a regular or forward mortgage. (Always check with your tax advisor).
• Guaranteed Availability: Unlike a typical home equity (HELOC) loan, your line of credit can never be revoked and is guaranteed by the government (not a bank or an annuity company).
• Unused Line of Credit can Grow: Amazingly and most uniquely, the unused or available line of credit on a Variable Rate HECM actually grows annually (at the rate of the sum of the mortgage rate and the annual mortgage insurance rate).Why? Because if you didn’t use the line of credit on the HECM, the lender can release the interest and mortgage insurance they had set aside for that anticipated usage back into your line of credit. To exaggerate; if you never used your HECM and never drew down any money over the course of your remaining life, it’s possible that the available line of credit would eventually exceed the original value of your home because the interest and mortgage insurance reserve is released if not used.
• Non-Borrowing Spouse: In the event, a spouse is not on title, but qualifies under the FHA rules, that spouse may apply for a deferral of the Due and Payable and continue to occupy the house under the same conditions. However, they may not access any unused HECM line of credit.
• Non-payment of Property Tax Assistance: The house can be foreclosed upon should the borrower(s) not pay the property insurance and tax. However, under FHA rules, the servicer must advance the monies to the borrower(s) to facilitate payment, and offer the borrowers up to 24 months’ in a payment plan to repay the overdue amounts. The FHA must give permission for a lender to foreclose if nonpayment of property charges, protecting the borrower against potential unfair lender practices.
• Tax-Free Proceeds: The money paid out is a loan. Therefore, it is tax- free (But always check with your tax advisor in the event the tax laws have changed).
• Family Purchase of Home at 95% of Appraised Value: In the circumstances that the home has no remaining equity, but the family wishes to purchase the home, they may do so at 95% of its then appraised value.
HECMs are complicated, and borrowers should be well educated on how to use them and what responsibilities they have once they get one. But they are a very creative product if used thoughtfully, and they do solve particular financial problems that face older borrowers.
If you have an existing mortgage, find the latest mortgage statement and note the balance and the payment. Do this for all liens on the property, such as HELOCs or even past due debts you are paying off but are secured by your home.
Find your latest annual property tax and property insurance invoices (or use the amount withheld by your mortgage company (if they pay your tax and insurance) and note the amounts. Also, if you pay HOA or a land lease, note those annual amounts as well
If you know you need major repairs, you might consider getting an estimate or using Home Advisor’s True Cost Guide. Necessary repairs will be completed with funds withheld from the HECM proceeds. If repairs exceed 15% of the home value, the lender may require the repairs be completed before approving the HECM
Know your monthly income from all sources for yourself and anyone else on title, aged 62 years or older. If your spouse is not on title, it would be useful to know his/her income as well.
The lender will need to know the monthly financial obligation expense of all the borrowers. So make sure you have a note of payments you or your spouse on title make on alimony, car, store card and credit card debt, judgment payments, bankruptcy payments and income tax/FICA you did not net out of compensation.
It’s a good idea to have the most current balances of any savings or retirement accounts on hand in case we need this information to help you qualify
It is possible we will need to use the net income (i.e. income less financial obligations) of your spouse who is not on the home’s title, or possibly ascertain the net income of one of your dependents living in the home with you to help qualify you for the HECM. If required, the HECM WIZARD will take you through the required data.