Home Equity Conversion Mortgage
An HECM reverse mortgage is the only federally insured reverse mortgage program. The FHA reverse mortgage program allows seniors to take advantage of the equity in their homes to supplement their incomed. The loan amount represents the amount of the equity the borrower has in the home. The money is then disbursed to the senior in either fixed monthly payments or as a line of credit.
One of the key benefits of the loan is that there is no repayment during the term of the loan. Also, seniors may use the funds as they see fit. In some cases, they may be able to use the money to purchase new homes, if needed. Seniors 62 and older may qualify for the loan if they meet FHA lending guidelines, and have enough equity in their homes. Borrowers must apply for the loan through an FHA-approved lender. Keep reading for answers to questions such as, “What is a HECM loan?” and “How do I qualify for the program?”
What is an HECM loan?
Seniors 62 years of age and older can take advantage of an HECM loan to supplement their incomes. More commonly known as a reverse mortgage, the home equity conversion mortgage allows borrowers to receive a portion of the equity in their homes in the forms of fixed payments or a line of credit.
What are the benefits of the HUD reverse mortgage?
The HUD reverse mortgage has many benefits that make it a popular loan product among seniors. It is an affordable and flexible option to get cash by using the equity in their homes. An HECM loan is an excellent way for seniors to supplement their incomes during retirement. Also, borrowers may use the proceeds from their loans as they see fit. In some cases, they may be able to use the funds to purchase new homes.
One of the most significant benefits of this type of loan is that there is no need to repay the loan during the loan term. The loan becomes due once the senior moves out of the home for 12 months, or once he or she has passed away. Also, borrowers have flexible options for how they receive their funds. They can elect monthly payments from their HECM loan funds, or choose to receive the funds as a line of credit. Learn about more HECM benefits by downloading our comprehensive guide.
The FHA Reverse Mortgage for Purchasing a New Home
Seniors looking to downsize into smaller homes find that the HECM purchase program an excellent option to minimize the out-of-pocket costs associated with purchasing the home. Under the HECM loan purchase program, buyers can use the funds from their loans to finance new homes.
There are strict rules for this program, however, and several criteria the borrower must meet in order to qualify. Borrowers must meet FHA income guidelines for the new loan. Also, the borrower must pay a portion of the sales price of the home in cash. Finally, per HECM guidelines, the borrower must occupy the new property within 60 days of closing.
How to Qualify for an HECM Mortgage
The FHA reverse mortgage is a specialized program only available to a select group of individuals under stringent guidelines. As such, applicants must meet a variety of HECM eligibility criteria to qualify. For instance:
- HECM applicants must be 62 years of age or older.
- Lenders require borrowers to have considerable equity in their homes in order to qualify.
- Per FHA guidelines, loans are available for single-family homes. (Multi-unit properties may be eligible if the borrower occupies one of the units.)
Borrowers must also meet FHA credit guidelines. The minimum credit score for an FHA loan is 580. However, scores as low as 500 may be allowed under specific circumstances. Lastly, anyone who wishes to get an HECM loan must attend a reverse mortgage counseling session with an HUD specialist. The counseling session is required, because the FHA wants to ensure borrowers fully understand the terms of their reverse mortgages. Click here to download our guide that includes complete information on how to qualify for the program.
How much does a home equity conversion mortgage cost?
FHA HECM loans are an affordable loan product. However, there are still costs for which a borrower is responsible. Many of the costs for an FHA HECM loan can be financed into the loan to minimize the out-of-pocket expenses for the applicant. At closing, the borrower is responsible for origination fees, which is the amount the lender charges for processing the loan. The borrower is also responsible for:
- Third-party charges, such as the appraisal fee or credit report fee.
- Mortgage insurance.
Disbursement Options for a HECM Loan
When it comes to how they wish to receive funds from their HECM loan, seniors have flexibility. They may elect to receive equal monthly payments from their HECM loan funds for as long as one of the borrowers lives in the home. Another option is to receive equal monthly payments over a fixed period of time, which is determined by the borrower.
A line of credit is an additional option that allows the senior to withdraw money at any time in amounts of his or her choosing. Seniors can also elect a combination of a line of credit or fixed monthly payments.
How can I get an HECM loan?
The HECM loan is the only federally insured reverse mortgage program. Given this fact, applicants must apply for an FHA reverse mortgage by finding an FHA-approved lender, first. Only FHA-approved lenders may offer the loan. Lenders must adhere to guidelines established by the FHA, which ensures safe and fair lending practices that protect borrowers.
The best source for locating an FHA-approved lender is through the lender list on the HUD website. The lender finder tool allows buyers to search for lenders based on a set of criteria that includes lender name, city, county and ZIP code. Consumers can also narrow the list to those who specialize in single-family homes, or those that specialize in multi-family dwellings.
Borrowers must first attend on HECM counseling session to get a reverse mortgage. Due to the complexity of the loan, FHA requires consumers to have a full understanding of the terms of the HECM program before they are approved.