HECM – FHA Government Insured Reverse Mortgage
Get ready, because we are about to explore one of the best financial retirement tools available to homeowners that will not only minimize your monthly out of pocket debt, but can also provide available cash! First, we must start this informative article with the question that is on everyone’s mind. What is a home equity conversion mortgage? The answer is quite simply a HECM is just a mortgage! However the HECM happens to be a program that offers benefits and advantages that no other mortgage in the market offers. A HECM offers flexibility allowing homeowners several different ways to access your home equity. The unique aspect about the HECM is that you can set it up to work exactly how you want it too. The HECM can accomplish many things to fit perfectly into retirement or working life. I am going to go step-by-step, so that when you finish this article you will know everything there is to know about a HECM including what a HECM can do for you.
A HECM is a mortgage that is available to homeowners where at least one borrower is the age of 62 or older. If a married couple owns a property jointly and they are applying for a HECM, but one of the borrowers is 62 years old and the other borrower is younger, they can now be approved. The younger spouse will just be seen as a “non-borrowing spouse,” but can still have survivorship rights to continue living in the property with the HECM if something were to happen to the spouse. We talk a little more in depth about this in a section titled Non-Borrowing Spouse.
There are (2) main programs that are considered to be reverse mortgages. The first is the HECM reverse mortgage, which is insured by FHA. HECM, or Home Equity Conversion Mortgage, is the most familiar reverse mortgage program to consumers. This program accounts for the high majority of reverse mortgages on the market. The second program is the jumbo reverse mortgage. This program is not a government insured reverse mortgage, but it can offer benefits to homeowners who have properties that will appraise for over $1,000,000. The HECM program has a lending limit of $679,650, but still offers advantages to those who have property values that are $1,000,000+. The jumbo reverse mortgage program will allow you to use an appraised value over $679,650 for loan purposes. The jumbo programs tend to have higher interest rates and do not offer a line of credit feature. They also have a lower loan-to-value, so if your home might appraise for over $679,650 make sure to explore both options to make an informed decision.
1) What Is A HECM Reverse Mortgage?
A HECM allows you to turn the home equity in your primary residence into cash and eliminates the requirement of having to pay your mortgage payment out of pocket. Homeowners get the best of both worlds! The HECM also allows you to access your cash in a variety of ways including through a line of credit, as cash at closing, or received as monthly disbursements.
Let’s talk a little more about turning your home equity into cash with a HECM reverse mortgage. What does that mean and how does it work? With a HECM every homeowner qualifies for “x” amount of money based on the age of the youngest homeowner and the amount of equity remaining in the home. We can figure out the available equity by using an estimated appraised value of your property and subtracting from that any liens and/or mortgages that will need to be paid off. You can check your estimated appraised value by inputting your property address in Zillow or Redfin.
Appraised Value – Liens/Mortgages = Home Equity
The net result is your equity! Now, when qualifying for a HECM reverse mortgage a portion of that equity will be available to you based on the youngest homeowners age. For example, let’s say the age of the youngest homeowner is 67 years old and the appraised value we are using is $400,000. The starting approved loan balance in the HECM program is $222,400. If the homeowners do not have a mortgage or any liens against the property then they will qualify for $222,400 minus any FHA insurance premiums or fees. If the homeowners have a current mortgage of $100,000 then after we pay that off they would have $122,400, minus any FHA insurance premiums or fees. If the homeowner currently has a mortgage payoff amount of $200,000 then they will most likely not have any extra available money in the reverse mortgage, BUT they will be able to eliminate having to pay the mortgage payment out of pocket. The mortgage payment is usually the highest monthly expense, so eliminating that alone can be life changing. It is that simple! How you use that available money in the reverse mortgage is up to you. You can request cash at closing, place the money in a line of credit for future use, or receive monthly disbursement payments for a fixed period of time or for the rest of your life. In addition to these (3) options you can do a combination of all (3). It is completely up to you!
Now that you have heard me say you will not have to pay your mortgage payment out-of-pocket you are probably asking yourself, how is that possible? Easy, instead of you having to pay every month from your own proceeds the interest payment is instead applied to the mortgage loan balance. It is like the home is paying for itself using the equity. However, like I said before one of the biggest advantages to a HECM is that you can customize the mortgage program to work exactly how you want. If you want to make the monthly interest and MIP payment you are allowed to do that. If you want to pay just the monthly interest and insurance premium, or even pay periodically like every quarter or per annum you can do that too. If you did not want to make a mortgage payment ever again out of pocket then that is also encouraged! How you treat your HECM reverse mortgage is completely up to you. The only thing you have to make sure of is that you are making your property charges on time such as property taxes, homeowners insurance and any HOA dues. There is an option that I will speak about a little later that discusses an additional feature that will also pay your property taxes and homeowners insurance using a set-aside that is setup with your HECM. This option is known in the reverse mortgage industry as a LESA, or Life Expectancy Set-Aside.
2) What Are The HECM Proceed Options?
How you take your available money with a HECM is always an important decision. The good news is that you have (3) options that can be used individually, or together, allowing you to custom fit your HECM reverse mortgage. Also, we can assist to setup whatever you think might work the best now, but you always have the option to change and modify in the future. Again, it is completely up to you how you customize your HECM to work for you.
Cash at Closing
This is an option that allows you to receive money immediately after the reverse mortgage funds. You can specify any amount that you qualify to receive initially and we will set it up. Escrow will wire your requested cash amount directly into your bank account.
Line of Credit
A line of credit is money that is available to you at any time, but does not accrue interest, because it is not part of the loan balance. Only after you pull money from the line of credit does it then get applied to the loan balance. This is the most popular option, because it allows you to control your loan balance. Being able to control your loan balance also allows you to control how much interest and MIP is applied each month. In addition the line of credit comes with a great feature that is unlike any other line of credit. There is a growth rate attached, so every month you will see more available money in your line of credit. The growth rate will always be .50% higher than your interest rate and potentially provides a nice additional stream of available money. You can request as little or as much as you want at any time and the money will be wired directly into you bank account.
Monthly Disbursement Payments
A monthly disbursement payment is a monthly payment that you will receive for a set duration of time. This duration of time can be anywhere from one year to the rest of your life. Yes, you can setup a monthly disbursement to be received for the rest of your life. How much you qualify to receive depends on the youngest spouses age and how much equity is in the property. You have the option of starting, or changing, a monthly disbursement payment at any time during the HECM loan process or even after your HECM reverse mortgage funds.
3) What Is The HECM Eligibility?
Now that you have read about some of the advantages and benefits of the HECM program you might ask do I qualify? I cannot tell you for sure without knowing the scenario, but I will go over some of the key questions we ask when qualifying a homeowner and why we ask.
A HECM is available to homeowners where at least one borrower is the age of 62 or older. If a married couple owns a property jointly and they are applying for a HECM reverse mortgage, but one of the borrowers is 62 years old and the other borrower is younger they can now be approved. The younger spouse will just be seen as a “non-borrowing spouse,” but can still have survivorship rights to continue living in the property with the HECM reverse mortgage if something was to happen to the spouse.
When qualifying homeowners for a HECM we do look into each borrowers payment history. We accomplish this by initially reviewing the following:
Credit report will be ordered, so we can review all the open and closed accounts. We are mainly concerned with revolving payment history within the past 12 months and all installment payment history within the past 24 months.
24 month payment history on property taxes
12 month payment history on homeowners insurance and flood insurance if required
24 month history on HOA dues and fees if applicable
There can be some derogatory accounts on credit including late payments in the previous 12-24 months and further derogatory accounts that date back before 24 months. The best way to discuss your credit history is by speaking with one of our HECM reverse mortgage advisors.
Social security, pensions, W2 employment and self-employment are all acceptable forms of income as well as monthly disbursements from an IRA. We can also use bank accounts, stock accounts, bond account, etc to show as income. In addition, the government recently clarified that we can also use the proceeds from the HECM to boost a homeowner’s income. Again, these questions can easily be answered by one of ourHECM reverse mortgage advisors.
4) What Is The Allowable HECM Property Types?
We have briefly discussed what the basics are when qualifying a potential borrower for a HECM reverse mortgage, but now let’s talk about the types of homes and properties that are allowable. Each state, county and even city contains different types of residential properties that are conforming to that area. Some of these types of properties may or may not have restrictions per FHA when qualifying for a HECM. Below are some examples of allowable property types along with any additional restrictions that may apply.
Single Family Residence for HECM
This is the most common property type that we see. Generally speaking this type of property is an eligible property type when applying for a HECM. This must be the primary residence of the borrowers applying for the HECM. If this property is not currently occupied by the borrowers applying for a HECM that will be a problem. If you run a business from your home and that takes up more than 20% of the property square footage then that can be an issue to discuss. If you grow agriculture on your land for commerce then that is an issue to discuss. These are some examples of, but not all, of the questions that we may ask when finding out you have a single-family residence. Other than that the main concern is usually the general well being of the home and if there is any deferred maintenance needed.
Multi-Family Residence for HECM
This property type applies to 1-4 family residences. Just like a single-family residence these types of properties are generally eligible for a HECM. We would generally just ask how many units are currently being rented and if there is any deferred maintenance to the property. In addition, it is required that the borrowers applying for the HECM retain and occupy one of the units as their primary residence.
Condominiums for Reverse Mortgage
Condominiums can have one obstacle when qualifying for a reverse mortgage. The association, if not FHA approved, needs to file an application with HUD to get approved prior to a homeowner applying for a reverse mortgage. If you are in a condo and would like to check to see if your association is approved please click on the following FHA condo approval list. If you are having trouble with the link, or have any other questions concerning your condo please call one of our reverse mortgage advisors, or leave a comment below and we will answer immediately. In addition, it is required that the borrowers applying for the reverse mortgage retain and occupy the condo as their primary residence.
Manufactured Home for HECM
These are allowable property types. There are a couple things that we will need to process before we can officially advise if a manufactured home would be eligible for a HECM. Was the manufactured home built before or after 1976? Does the manufactured home rest on permanent foundation? Does the manufactured home have the HUD tags and labels affixed? Is the land that the home is on leased or owned? Generally speaking the manufactured home needs to be built after 1976 and needs to be on permanent foundation, because we will have an engineer inspect and certify for loan purposes. HUD tags make things easier, but we can order a cert from the government confirming all the information needed. In addition, it is required that the borrowers applying for the HECM reverse mortgage retain and occupy the manufactured home as their primary residence.
We understand that borrower eligibility and property eligibility can be a little confusing, but that is why we are here! You can leave a comment below this article and I will reply right away with guidance, or you can call one of our HECM reverse mortgage advisors right now at toll-free 877-676-6542.
5) What Is A Non-Borrowing Spouse?
I have spoken a couple times in this article about “non-borrowing spouses.” A non-borrowing spouse is a spouse that is either under the age of 62 years old, has never been on title to the property, or does not call the subject property their primary residence. The government recently changed the non-borrowing spouse guidelines to better protect the younger spouse in the event the older spouse passes away. Even though a non-borrowing spouse cannot be on the HECM loan they will remain on title to the property and do have protections in the HECM program. There are (2) different types of non-borrowing spouses. The first type is an “eligible” non-borrowing spouse. The second type is an “ineligible” non-borrowing spouse.
Eligible Non-Borrowing Spouse
An eligible non-borrowing spouse lives in the subject property and calls it their primary residence. The eligible non-borrowing spouse will have survivorship rights in the event the older spouse was to pass away. The only thing that will freeze is an open line of credit. The non-borrowing spouse will not have access to any available money. They will be able to live in the property under the HECM reverse mortgage as long as they keep up with the property charges like homeowners insurance, property taxes and if any HOA dues are required. Since the HECM will continue for the younger spouse the HECM reverse mortgage loan figures will be based on the non-borrowing spouses age.
Ineligible Non-Borrowing Spouse
An ineligible non-borrowing spouse does not live in the subject property and does not call the subject property their primary residence. This type of non-borrowing spouse does not have survivorship rights to live in the subject property if the older borrower passes away. The reverse mortgage loan figures will be based on the main borrower residing in the property and who is applying for the HECM. They are the only one calling the subject property their primary residence. An ineligible non-borrowing spouse will need to present (2) forms of proof that shows they are not living in the property. Common forms of proof would be bank statements, utility statements, tax returns, investment accounts, or installment loan statements that show a different deliverable address.
6) What Is The Amount I Can Qualify For With A HECM?
At the beginning of this article in the “How Does a HECM Work” section I discussed that two main factors for qualifying a homeowner is finding out the age of the youngest borrower, or eligible non-borrower spouse, and calculating the current home equity. We have also reviewed how the lending limit of $679,650 for the HECM program might influence how much you qualify for to receive. The last piece of the pie is factoring what your loan-to-value is based on the youngest borrowers age.
Typically, a HECM reverse mortgage borrower can expect to qualify for 50%-70% of their home value. Of course, other factors like lending limits can play a role into those percentages referenced. The younger you are in the program the less of a loan to value percentage you will qualify to receive. The reason being you have a better potential to live in the subject property for a higher number of years, so the government needs to factor that into the equation. Similarly, the older you are in the program the higher a loan to value percentage you will qualify to receive.
7) What Is The Cost Of A HECM?
It is time to get down to the numbers. How much does a HECM reverse mortgage cost? I am glad you asked! There are (3) main fee categories that I will discuss below: Origination fee, other costs/financed fees and the initial mortgage insurance premium. In addition, I will discuss the monthly servicing fee and servicing fee set-aside in the event a lender is charging that fee for a program.
The origination fee is an allowable fee that a lender can charge the homeowner for the origination of the HECM. The origination fee is typically 2% of the appraised value and is capped at $6,000. The homeowner is not asked to pay for the HECM reverse mortgage origination fee out of pocket. Instead the fee is financed through the HECM.
Other Costs/Financed Fees
Financed fees are seen on HECM applications as “other costs.” These are the tangible items and services needed to complete the HECM. These fees can include appraisal fees, escrow fees, title fees, credit reports, notary and any other applicable closing costs. These fees are not required to be paid outside of closing, but rather they are added to the starting loan balance and financed through the HECM reverse mortgage.
Initial Mortgage Insurance Premium
The initial mortgage insurance premium, or IMIP, is an initial fee that is charged on all HECM loans and it goes to FHA to insure your HECM. The insurance protects all parties involved with the HECM including you the homeowner/borrower, the bank and the government. This protection allows you to stay in your home for as long as you choose with the HECM. However, all homeowners are required to stay current on their property tax payments, homeowner’s insurance payments and any HOA dues. The insurance premium is 2% of the appraised value, or the maximum lending limit of $679,650.
A servicing fee can be implemented by a lender to pay for the ongoing servicing, or upkeep, of your reverse mortgage. The servicing company of the reverse mortgage is responsible for managing a borrowers available line of credit and issuing monthly disbursement payments. If there is a partial or life expectancy set-aside the servicing company will be responsible for making the homeowners insurance, property tax and any HOA payments on time. In addition, the servicing company will send monthly statements showing the current details and status of the borrowers HECM reverse mortgage. This servicing fee can range from $25-$35 a month. Since this is a fee to be paid for the life of the loan the lender is required to create a “set-aside” at the beginning of the loan. This set-aside can be $3,000+ and will be subtracted from your available money with the HECM.
8) What Are The HECM Programs and Rates?
The reverse mortgage has various options for programs and rates that homeowners can select. As I have discussed previously there is currently a government insured program know as the HECM, or Home Equity Conversion Mortgage, that accounts for a high majority of the reverse mortgages. The second option is the jumbo reverse mortgage, which is not government insured. Both programs have their advantages and benefits that I will go over next in more detail.
The HECM reverse mortgage program is government insured, available in all 50 states and is currently the most popular reverse mortgage program available today. The program is available for homeowners that are 62 years or older and can accompany a non-borrowing spouse. The lending limit is set nationally at $679,650 and offers advantages to homeowners who have properties over a $1,000,000+. To understand the option homeowners have with a HECM reverse mortgage there are two main programs to contemplate. Do you want a fixed rate or an adjustable rate program? The answer is not as easy as it seems, because both reverse mortgage programs are different in how they allow you to access money.
HECM Fixed Rate Reverse Mortgage
The fixed rate program is a popular program that does allow homeowners to access their equity and turn it into cash at closing. The fixed rate programs require that borrowers take any available money in the HECM as cash at closing. The reason that cash at closing is the only available payout option is because the fixed rate programs are known as being “closed end.” Once the HECM reverse mortgage funds all payouts and payoffs are disbursed and the loan is effectively closed. Everything involved with the loan was satisfied and disbursed upon funding. This can benefit homeowners who are just looking for a cash payout. The rate also remains fixed for life, so it will never change.
HECM Adjustable Rate Reverse Mortgage
The adjustable rate HECM contains more payout options for homeowners to utilize. The adjustable rates also offer two different index rates. First, the adjustable rates will allow a borrower to access their money in three separate ways including cash at closing, line of credit and a monthly payout. A borrower can select any one of these payout options, or a combination of all three. The choice is completely up to the homeowner on how they would like to access their money. The reason this program is different from the fixed rate is because it is “open end.” Once an adjustable rate HECM reverse mortgage funds the loan remains open, so that borrowers can continue to access their funds through their line of credit or monthly payouts.
The index rates on the adjustable programs are based on the LIBOR rate, or London Interbank Offered Rate. Borrowers can select from the Monthly LIBOR or the Annual LIBOR. Payout options remain the same for both the Annual and Monthly programs, but the rates will vary. The Annual LIBOR program is based on the Annual LIBOR rate and it will only adjust once a year. The Annual program has an annual cap rate of 2% and a lifetime cap rate of 5% over the starting interest rate. However, the Monthly program will adjust once a month and the lifetime cap rate is 10% over the starting interest rate. There is no annual cap for the Monthly program.
9) What Is A HECM Lending Limit?
$679,650…you have seen this referenced a few times now in the various sections. I have briefly discussed what this number represents, so I thought I would dedicate a section to make sure it is clearly understood. The lending limit is issued by HUD and is approved in all 50 states. The $679,650 is a number that represents how much a property can be valued for loan purposes. If you have a home that appraises for anything under $679,650 then these guidelines do not pertain to your HECM loan. If you have a home that will appraise for more than $679,650 then for loan qualifying purposes we will only be using $679,650 of that value. This is in no way diminishing your home value, or saying it is not worth as much as the appraisal states. Since the government insures every HECM they have decided that they need to cap the lending ability at $679,650 for the time being. It can increase, or decrease, at anytime based on a government vote. Please know that if you have a home that is a $1,000,000 you still have the same advantages and benefits in the HECM program as anyone else. We will just need to cap the value at $679,650, because it is a HUD requirement.
10) What Is A HECM Counseling Session?
One of the first requirements that must be fulfilled when applying for a HECM reverse mortgage is completing a counseling session. HECM counseling is a 1-hour counseling session with all homeowners present in which the HECM is discussed to make sure all parties understand the program. The counseling session is usually conducted over-the-phone, but can also be completed in-person if the homeowner requests. The counselor is HUD approved counselor that is a third-party representative to your HECM. If you are interested in completing a HECM reverse mortgage counseling session then please contact Good Day Reverse. We have a list of counseling agencies that are in your local area as well as counseling agencies that service the entire United States. Typically, the cost of a HECM counseling appointment can be anywhere from $125-$150. The fee can be completely waived by the counseling agency if they can prove a hardship. Once the counseling session is complete the counselor will issue a completed counseling certificate. This document is very important and is needed before we are allowed to order title, escrow and many other services. The counseling certificate is valid for 6 months, so it can be best to complete when you are serious about proceeding with the HECM to prevent the certificate from expiring.
If you are in the state of California there is an additional ruling that requires each borrower to review and sign (2) forms before completing the counseling session. If you are in the state of North Carolina or Massachusetts you are required to complete your HECM reverse mortgage counseling in-person.
11) Finding The HECM That Works For YOU
There are many different options including which rate, margin, or company to use. What works best for one homeowner might not work the best for another. The HECM can be tailor fit, so that every homeowner ensures they have their specific needs met. Hopefully this article has given you some key information that will help you decide which HECM reverse mortgage is right for you. We have many other reverse mortgage articles that can dive into each aspect of the program a little more, so please take some time to check out. It might further increase your HECM reverse mortgage knowledge and put you on the right path to finding your perfect HECM!
Good Day Reverse, Inc is licensed or registered to engage in reverse mortgage loan origination activities in the state of California
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