There are two types of Reverse Mortgages that you need to be aware of. The most popular is the FHA insured Home Equity Conversion Mortgage or HECM (Pronounced HeckM). The second type is a Proprietary Reverse Mortgage that is not insured by FHA. If you don’t qualify for, or your home value exceeds the FHA loan limits, then a Proprietary Reverse Mortgage may be an option for you. Remember, a Reverse Mortgage whether HECM or Proprietary is a versatile financial tool that can be individualized to your specific financial needs.
I am going to focus on the FHA Insured Home Equity Conversion Loan (HECM) for this article. First you need to be 62 or older to qualify for the HECM. If your spouse is younger than 62, they may be on title, however as a non-borrowing spouse they will not be on the loan. If the older spouse dies the younger spouse may be able to live in the home however, they will not have access to the HECM funds. The amount borrowed will be based on the non-borrowing spouses age which will affect the amount of funds available. If both spouses are 62 or older, the amount of funds available will be based on the younger borrower, since they will have a longer life expectancy.
You may purchase a new home or you may refinance your current home with a HECM as long as the home will be your primary residence that you live in for at least 6 months and 1 day per year.
There isn’t a principal and interest payment, however you are responsible for paying the real estate taxes, homeowners’ insurance, homeowner association dues and maintaining the property. If there is not enough income to cover these expenses you may be required to have a life expectancy set aside, think escrow account, to pay your real estate taxes and homeowners’ insurance.
You may request a lump sum, a monthly set aside of income, or a line of credit or a combination of these. Lump sum is usually used to pay off an existing mortgage and/or additional debts. A monthly set aside of income is for someone who needs additional monthly income to meet expenses. A line of credit is used when there is a large amount of equity and the borrowers only want to use the funds as needed.
The loan amount you may qualify for is based on the youngest borrowers age, the appraised value of the home and the fixed or adjustable interest rate and margin. The loan amount is limited so that you do not exceed the value of your home prior to your permanent departure based on average appreciation rates and expected interest accrual. Any liens on the property will need to be paid off with either your own funds and/or proceeds from the HECM. There can be no other liens on the property at the funding of the reverse mortgage. The HECM will be your new mortgage loan and you will be on title to the property just like any other mortgage loan. The loan becomes due and payable when the last borrower leaves the home permanently or if there is a default under the loan terms. The HECM can be paid off, refinanced into another loan, or the home may be sold.
A HECM is an FHA insured non-recourse loan that makes sure that you or your heirs will not have to pay back any loan balance that exceeds the amount of the home value when the last borrower permanently leaves the home. The home is treated as its own entity. Other assets like retirement accounts are not considered. It is strictly based on the home value.
The equity in your home is based on the appraised value minus any liens. A HECM loan accrues interest based on the amount of funds borrowed, the interest rate and the monthly mortgage insurance premium. Which means that every month you will owe more on the loan and your equity position most likely will decrease every month.
Remember this is a loan, so the funds you use are not normally taxed as income (be sure to consult your tax advisor for your individual situation). However, you should be aware that some social services monitor the funds in your checking and savings and if you exceed their asset thresholds you may lose those services.
FHA requires both an upfront mortgage insurance premium of 2% and a monthly mortgage insurance premium based on the maximum loan amount. Similar to an FHA forward mortgage. These funds are sent to FHA and kept in a pool of funds that are used to pay lenders when home values are less than what is owed. You will see the upfront mortgage insurance as a closing cost and the monthly mortgage insurance will be seen on the amortization schedule showing annual projections. All closing costs can be financed into your home loan or paid by you. Remember, on a HECM refinance, you will have a 3 day right of rescission starting from when you sign the documents. Keep this in mind if you are paying off debts with the proceeds.
You must attend a mandatory government approved Reverse Mortgage counseling session prior to the lender taking an application. This can be done in person or over the phone and all borrowers need to attend the session. Prior to counseling your lender will request your income and asset information along with a credit report to pre-qualify you. This information is used by both the lender and the counselor to make sure the HECM is a viable option for your individual situation. Credit history and credit scores are generally less strict then conventional loans and your interest rate is not based on your credit score.
You may consult with your family, accountant, financial planner, attorney or anyone else that will help you to make a decision or you may make the decision to continue on your own once you have a signed counseling certificate.
Since each individual circumstance is unique you will want to look at all your options before taking out a HECM. Have a local HECM lender run a HECM analysis which will give you 3 comparisons. Look them over and make sure you understand your options. Think of the Analysis as an estimate, based on estimated home value and current interest rates. Once you decide to move forward, complete the required HUD counseling and receive your signed counseling certificate. Contact your lender to fill out the application and receive your initial disclosures. Once the appraisal comes back, the proceeds may adjust up or down depending on the appraised value.
Remember, each client’s situation will be different based on all of the factors above and their own financial goals. There are many ways to use a HECM mortgage to your advantage. I am here to answer any of your questions and can put together an estimated loan package specific to your individual financial goals. I can be reached at 509-888-6700.
Janice L Brown, NMLS 147704
American Pacific Mortgage, NMLS 101328/1850
PO Box 1351/Wenatchee, WA 98801
Equal Housing Opportunity
American Pacific Mortgage Corporation. All information contained herein is for informational purposes only and, while every effort has been made to ensure accuracy, no guarantee is expressed or implied. Any programs shown do not demonstrate all options or pricing structures. Rates, terms, programs and underwriting policies subject to change without notice. This is not an offer to extend credit or a commitment to lend. All loans subject to underwriting approval. Some products may not be available in all states and restrictions apply.
Reverse mortgages are loans offered to homeowners who are 62 or older who have equity in their homes. The loan programs allow borrowers to defer payment on the loans until they pass away, sell the home, or move out. Homeowners, however, remain responsible for the payment of taxes, insurance, maintenance, and other items. Nonpayment of these items can lead to a default under the loan terms and ultimate loss of the home. FHA insured reverse mortgages have an up front and ongoing cost; ask your loan officer for details. These materials are not from, nor approved by HUD, FHA, or any governing agency.