HECM Reverse Mortgage

FHA Insured Reverse Mortgage

Home Equity Conversion Mortgage (HECM) is the most common product among reverse mortgage loans. If qualified, it allows you to convert a portion of your home equity into capital, based on your age and your home’s appraised value. The thing that sets HECM apart from the crowd is its US government-insured positioning.

Want to learn more about HECM to make lucrative reverse mortgage decisions? Consult our experts today!

What is an HECM?

HECM stands for Home Equity Conversion Mortgage – the most common type of reverse mortgage loan.

Like other reverse mortgage loans, an HECM allows eligible borrowers to convert some of their home equity into cash. The maximum amount of the loan is based on the home’s appraised value and the borrower’s age at the time of application. The loan earns interest over time, but no payments are due until the borrower dies, sells the home, transfers his principal residence, or fails to comply with the ongoing requirements of the loan.

However, what sets an HECM apart is the fact that it is insured by the US government, particularly the Federal Housing Administration (FHA). The FHA insurance secures borrowers from lender failure and secures lenders from potential loss at the time of foreclosure.

In contrast, other reverse mortgage loans, such as propriety reverse mortgages or jumbo reverse mortgages, are backed by private companies instead of the FHA. However, the upside to these reverse mortgages is that they are not subjected to the same governmental restrictions as an HECM, e.g. the maximum loan amount which is currently set at $765,600. This allows borrowers to receive significantly more cash, provided that the value of their home justifies such an amount.

With that said, however, not every person has a high-value home. For the average American, the loan limits of an HECM will likely be sufficient.

Interested to learn more about reverse mortgage HECM Vs. HELOC

How do you qualify for an HECM?

The requirements of an HECM are vastly different from those of a conventional mortgage.

While conventional mortgages place a strong emphasis on income and credit standing, a qualified HECM borrower need only have the following requirements:

  1. Must be at least 62 years of age.
  2. Must be using the mortgaged property as his principal residence.
  3. Must have completed a reverse mortgage counseling session from a counselor approved by the Department of Housing and Urban Development (HUD), which gives you some basic information regarding the HECM and helps you decide if you should get one.
  4. Must have little or no existing mortgage on the same property. If there is an existing mortgage, the balance thereof must be small enough to be paid by the HECM proceeds.
  5. Must not have delinquent federal loans or property taxes.
  6. Must pass the financial assessment test, which determines if the borrower is able to comply with the ongoing requirements of the HECM, e.g. timely payment of property taxes and insurance premiums, and keeping the mortgaged property in good condition.

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What properties are eligible for HECM?

To qualify for an HECM, the mortgaged property must be used as your principal residence. Thus, secondary homes or investment properties are not eligible. The property must be either a single-family home or 2 to 4 unit home.

Reverse mortgage on manufactured homes may be eligible if they comply with the minimum requirements set by the FHA.

Reverse mortgage on condo may also be eligible if they are part of an HUD-approved project.

Ideally, we would provide you with a complete list of these requirements. However, there is simply too much information to consolidate in one post. The minimum requirements are provided in a number of HUD Manuals and Mortgage Letters, which need to be thoroughly studied to determine which requirements apply to your specific property. The best way to determine if your property qualifies for HECM is to have it examined or appraised by an expert, which your reverse mortgage lender can easily refer you to.

When does your HECM need to be repaid?

Like other reverse mortgage loans, an HECM need to be repaid when the borrower

  1. dies,
  2. sells the home,
  3. transfers his principal residence, or
  4. fails to comply with the ongoing requirements of the loan.

When the borrower dies, his heirs can still keep the mortgaged property, provided that they pay off the balance of the HECM. However, if the lender does end up foreclosing the property, the proceeds of the sale will be used to pay off the loan and any excess will be given to the heirs. But if the proceeds are less than the loan balance, the lender cannot recover the deficiency from the heirs. Instead, the lender must recover the deficiency from the loan’s FHA insurance.

If the borrower chooses to sell his home, he must use the proceeds of the sale to pay off the balance of the HECM. If there is any excess, he is allowed to keep it. On the other hand, if the proceeds of the sale are less than the balance and the property is sold at its appraised value, the entire amount must be used to pay off the balance and the lender must recover the deficiency from the FHA insurance.

If he transfers his principal residence, the balance must also be repaid. He may choose to sell his house and undergo the process described above or have the same foreclosed.

Complications arise, however, if the borrower’s spouse is still living in the mortgaged property when the borrower dies or moves out. There are several possible scenarios where the spouse can still be allowed to stay in the mortgaged property, but they are too lengthy and complicated to include in this post. If this particular situation concerns you, it would be best to seek expert advice to explore your spouse’s future options.

Finally, if you fail to comply with the ongoing requirements of an HECM, such as the timely payment of property taxes or insurance premiums, and maintenance of the mortgaged property, you will probably receive a notice of default or foreclosure. You will need to act quickly to fix your alleged violations. If property tax and insurance premiums need to be paid but you cannot afford to do so, try asking your reverse mortgage counselor for advice since there may be assistance programs offered by your state or other agencies. On the other hand, if the mortgaged property needs to be maintained, then you should ask your reverse mortgage lender for a list of necessary repairs. Ask different contractors to estimate the cost of repairs. If you cannot afford the repairs, contact your reverse mortgage counselor for advice.

Would you like to explore a HECM reverse mortgage for your situation? Call us at (844) 230-6679 if you live in one of the following states. As a local reverse mortgage broker, we work with several reverse mortgage lenders across different states and cities and provide required consultation service with no pressure or obligation.

For other states, contact a good local reverse mortgage specialist who has originated a good number of reverse mortgage loans with a Broker License (NMLS) and preferably holds the designation ‘Certified Reverse Mortgage Professional (CRMP)’.

 

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