The Home Equity Conversion Mortgage (HECM) is FHA’s reverse mortgage program which enables you to withdraw some of the equity in your home. The HECM is a safe plan that can give older Americans greater financial security. Many seniors use it to supplement social security, meet unexpected medical expenses, make home improvements and more. You can receive additional free information about reverse mortgages by downloading a free booklet from the National Council On Aging, “Use Your Home to Stay at Home.  (Note: This booklet is very dated. Some of the information no longer applies.)

1. What is a reverse mortgage?

A reverse mortgage is a special type of home loan that lets you convert a portion of the equity in your home into cash. The equity that built up over years of home mortgage payments can be paid to you. But unlike a traditional home equity loan or second mortgage, no repayment is required until the borrower(s) no longer use the home as their principal residence or fail to meet the obligations of the mortgage. You can also use a HECM to purchase a primary residence if you are able to use cash on hand to pay the difference between the HECM proceeds and the sales price plus closing costs for the property you are purchasing.

2. Can I qualify for FHA’s HECM reverse mortgage?

To be eligible for a FHA HECM, the FHA requires that you be a homeowner 62 years of age or older, own your home outright, or have a mortgage balance that can be paid off at closing with proceeds from the reverse loan, and you must live in the home. You are also required to receive consumer information free or at very low cost from a HECM counselor. (Note: You can find a HECM counselor by asking your loan originator for a current list of FHA approved counseling agencies in your area.)

3. Can I apply if I didn’t buy my present house with FHA mortgage insurance?

Yes. It doesn’t matter if you didn’t buy it with an FHA-insured mortgage. Your new FHA HECM will be FHA-insured.

4. What types of homes are eligible?

To be eligible for the FHA HECM, your home must be a single family home or a 1-4 unit home with one unit occupied by the borrower. HUD-approved condominiums and manufactured homes that meet FHA requirements are also eligible. (Note: Many lenders have tightened up underwriting policies regarding condominiums and manufactured homes. Make sure your loan officer has the experience to help you.)

5. What’s the difference between a reverse mortgage and a bank home equity loan?

With a traditional second mortgage, or a home equity line of credit, you must have sufficient income versus debt ratio to qualify for the loan, and you are required to make monthly mortgage payments. The reverse mortgage is different in that it pays you, and is available regardless of your current income. The amount you can borrow depends on your age, the current interest rate, and the appraised value of your home, sales price or FHA’s mortgage limits, whichever is less. Generally, the more valuable your home is, the older you are, the lower the interest, the more you may borrow.

With a HECM, you don’t make monthly principal and interest payments, the lender pays you according to the payment plan you select. Like all homeowners, you still are required to pay your real estate taxes, insurance and other conventional payments like utilities. With an FHA HECM you cannot be foreclosed or forced to vacate your house because you “missed your mortgage payment.” (Note: Even HUD can be misleading here… unintentionally – you can certainly be foreclosed if you become seriously delinquent with real estate taxes, home insurance or if your home falls into very serious disrepair.)

6. Will I still have an estate that I can leave to my heirs?

When you sell your home, you or your estate will repay the cash you received from the reverse mortgage plus interest and other fees, to the lender. The remaining equity in your home, if any, belongs to you or to your heirs.

7. How much money can I get from my home?

The amount you can borrow depends on:

• Age of the youngest borrower
• Current interest rate
• Lesser of the appraised value of your home, the HECM FHA mortgage limit for your area or the sales price
• The initial Mortgage Insurance Premium (MIP) option you choose (2% HECM Standard option or .01% HECM Saver option)
• Your choice of HECM Standard programs or HECM Saver programs

You can borrow more with the HECM Standard option. Your costs will be lower with the HECM Saver.  Also, the more valuable your home is, the older you are, and the lower the interest rate, the more you can borrow. If there is more than one borrower, the age of the youngest borrower is used to determine the amount you can borrow.

8. Should I use an estate planning service to find a reverse mortgage?

FHA does NOT recommend using any service that charges a fee for referring a borrower to any  lender. FHA provides this information free.

9. How do I receive my payments?

You have five options:

• Tenure – equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.
• Term – equal monthly payments for a fixed period of months selected.
• Line of Credit – unscheduled payments or installments, at times and in amounts of your choosing until the line of credit is exhausted.
• Modified Tenure – combination of line of credit with monthly payments for as long as you remain in the home.
• Modified Term – combination of line of credit plus monthly payments for a fixed period of months selected by the borrower.

10. How do I find a lender offering HECM loans?

Both lenders and brokers may offer HECM loans if appropriately licensed or registered with the National Mortgage Licensing System (NMLS).  (Note: First Integrity Mortgage, LLC offers HECM loans and/or will refer you to a broker or lender in your area. Call Bob Irving at 1-877-994-2265.)

Author – Robert H. Irving, CSA®
Senior Reverse Mortgage Consultant – NMLS #19086

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DISCLAIMER: The information presented in this blog is accurate and correct to the very best of our ability. We are not legal experts and we do not attempt to give legal advice. Same applies to tax advice. Always consult an expert on these subjects. If you think we report something inaccurate, please let us know right away. If we write something you like, let us know about that, as well. Tell a friend or link to the site.

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Q – Please help us to understand the fees & costs for a reverse mortgage. They seem excessive. Carol S. – Lawrence MA
A – Don’t be overly focused on fees. They are what they are.. and they are not substantially different from regular conventional loans except that the details are more transparent when it come to federally insured reverse mortgages. The costs for a HECM (Home Equity Conversion Mortgage) loan can be broken down into three (3) simple categories. When this is quoted in a single lump sum the costs do seem high. But once you understand the breakdown the costs are fairly easy to grasp.
1- Origination Fee. This is the fee that the bank or the mortgage broker charges you, the borrower, for completing all the necessary details with respect to your application for the federally insured HECM program. Included is education and expert advice on selection of the most appropriate reverse mortgage loan program (there are several) and the pros/cons of each choice. Also, your loan officer coordinates and facilitates the underwriting process with the lender on your behalf. This fee is closely regulated by HUD and it is restricted to no more than 2% on the first $200,000 of the Maximum Claim Amount (usually the home value) and 1% on the remaining amount. This fee is limited by HUD to no more than $6000. If your home is worth $300,000, the origination fee will be no more than $5,000.
2 – FHA Mortgage Insurance Premium. This is an upfront cost mandated by FHA to insure your loan. It is the largest cost in ther transaction… usually more than 50% of total fees & costs. This fee is required by, regulated by and paid directly to FHA. The charge is 2% of the Maximum Claim Amount (usually the home value). On a $300,000 home, the FHA fee is $6,000. In addition to this upfront cost, you will pay an additional 1.25% added to your loan interest rate on an ongoing basis.
3 – 3rd Party Closing Costs. No matter what type of loan you do (forward, home equity or reverse), there are always requirements by the lender that involve third parties. In a reverse mortgage you will pay for an attorney to represent the lender’s interests, a title search and title insurance to guarantee ownership of the property, an FHA appraisal to establish fair market value of your home, a credit report, flood certification, plus recording fees to properly record mortgage documents. 3rd party closing costs vary from state to state. In some states lenders may also require a municipal lien certificate to insure that there are no current liens on your property. Courier fees are sometimes also included in this category.

Q – A lender told me that the new HECM Saver program with substantially reduced fees is not available in Massachusetts. Is this true? Byron – North Andover MA
A – This is NOT true! The loan officer you are speaking with is not being 100% straightforward. What he/she really means is that HIS/HER LENDER source is not approved. The Massachusetts Division of Banks has indeed approved several reputable lenders to offer the new HECM Saver program with vastly reduced fees. (In some cases fees are 50% lower than the HECM Standard program.) Please contact us and we will provide the information to you.

Q – We are confused. One lender is telling us that he charges no Origination Fee and no upfront FHA Mortgage Insurance fee on HECM loans. A second lender is quoting fees almost twice as high. What’s the story? Billy G – Salem NH
A – Unfortunately there are some loan officers who fail to adequately explain all available HECM programs to clients. Sounds like you may be talking to different lenders about two (2) distinctly different HECM programs. You could be comparing apples and oranges, in other words. Your loan officer also sounds confused as FHA Mortgage Insurance IS REQUIRED on every HECM loan. Sit down with an experienced reverse mortgage specialist you can trust… and ask for an explanation of each and every program and the associated costs. Discuss the disadvantages as well as the advantages. Some programs do have substantially lower costs than others. But as with most things, the devil is in the details. You might get much less money and/or you might be required to take all money you qualify for at loan closing increasing your interest cost over the life of the loan. You might also be paying a higher interest rate on the loan with the lower costs. The key is to find a loan officer you can trust… who will meet with you face-to-face as many times as necessary to insure that you fully understand all options, all benefits and all consequences. Don’t deal with anyone who won’t meet with you face-to-face in your home and at your convenience.

Q – How do I know what HECM reverse mortgage program is best for me? Louisa – Pelham, NH
A – Contact a reputable reverse mortgage specialist. Have an honest discussion to jointly determine what your actual needs are… monthly income, a large lump sum of money (to pay some bills, for example) or the ability to draw from a line of credit as necessary. Work through the details of each HECM program (Costs, dollar benefit, payment options) and the proper choice will become obvious.

Q – It seems like there have been a lot of recent changes to the HECM program. Should we continue to wait in case things get even better? Beth & Frank – Lawrence MA
A – This is a very frequently asked question. The short answer is if you need to do a reverse mortgage… don’t wait! Here’s why: Home values are continuing to fall (meaning you will likely qualify for less money the longer you wait), FHA counseling requirements are stiffening (borrowers are now tested on their understanding of the HECM program) and needs-based analysis with credit investigation will be implemented soon. HUD could decide tomorrow that potential borrowers who fail to meet a certain income level or credit score may not qualify for a reverse mortgage at all. Finally, the present maximum lending limit of $625,500 is just a temporary limit. Some believe HUD will revert to the former $417,000 limit… meaning borrowers with homes valued higher will not qualify for that additional amount. Of course, if you don’t really need a reverse mortgage… wait.

See more Frequently Asked Questions here

Author – Robert H. Irving, CSA®
Senior Reverse Mortgage Consultant – NMLS #19086

Subscribe to Reverse Mortgage Information by Email

>>> Subscribe to Reverse Mortgage Information – Click Here <<<

>>> Free Referral to Consultant In Your Area – Click Here <<<

DISCLAIMER: The information presented in this blog is accurate and correct to the very best of our ability. We are, of course, not legal experts and we do not attempt to give legal advice. If you think we report something inaccurate, please let us know right away. If we write something you like, let us know about that, too. Tell a friend or link to the site.

COPYRIGHT 2011: All posts herein are copyrighted by Robert H. Irving. You may link to any post as long as you properly credit the author and the blog. You may not copy or republish without permission from the author.

May I switch reverse mortgage payment plans in the future?

Yes, for a nominal fee (currently $25), you may switch payment plans at any time.

Will my heirs/children owe anything to my reverse mortgage lender if I die?

Upon your death, the HECM loan balance becomes due and payable if you are the last remaining borrower living in the home. Your heirs may either repay the loan balance or sell the property at “fair market value” through a licensed real estate broker.  When selling, if the loan balance due exceeds the value of the property, your estate owes ONLY the value of the property at that time. Any remaining balance will be forgiven.  No additional financial claims may be made against the estate or your heirs. If your heirs wish to purchase the home any pay the balance owed they may do so.

If my home’s value appreciates during the reverse mortgage mortgage term, who will be entitled to that money?

Under the terms of the HECM, you are legally required to pay back only the outstanding loan balance.  Any money remaining after the mortgage is paid goes to you or, upon your death, to your heirs.

What if I decide to sell my home and I have a reverse mortgage on it?

If you choose to sell your home, the outstanding reverse mortgage loan balance becomes due and payable at settlement. You or your estate will receive any proceeds exceeding the loan balance.

If I decide to pay off my HECM loan is there a prepayment penalty?

There is no prepayment penalty on HECM loans. You may pay back the loan anytime. If you have a reverse mortgage that is not a HECM, it could have a prepayment penalty.

Can I sell my home to my children and continue to live in it if I have a reverse mortgage?

If you sell your home to your children or any other individual, the HECM will be due and payable at settlement.  After the loan is repaid, any arrangement for your continued occupancy of the property must be made with the new owner(s). Consult your attorney about the pros/cons of a life estate which may accomplish your goal and is permitted by HUD under the HECM program.

What is the Federal National Mortgage Association’s (“Fannie Mae) role in the HECM program?

Fannie Mae has agreed to purchase adjustable rate HECM loans from lenders who originate them. They provide an active wholesale market for the securities.

Are all reverse mortgage loan officers licensed by my state?

Probably not. Only state regulated loan originators are required to be licensed by a state.  Some nationwide organizations operating Call Centers (telephone origination) are exempt. State licensed originators are screened with a criminal records check and a credit background check in some states and are supervised by a state entity… such as the Commissioner of Banks in Massachusetts. By 2010, it is expected that most states will require loan originators to be registered with the Nationwide Mortgage Licensing System (NMLS). For a map of states presently requiring NMLS registration, go here

Who determines the value of my home for a reverse mortgage?

Under HUD rules, an FHA certified appraisal must be done on your property to establish value.  Appraisal guidelines are very stringent.  Your home must meet FHA standards and the value arrived at could be less than your perceived estimate of full market value.  (Property values in most areas have fallen substantially in recent months.)  The most important thing to remember is that HUD/FHA is not offering to purchase your home… they are simply attempting to arrive at a reasonable, timely, verifiable estimate of value for purposes of the HECM program.  If you are not satisfied with an appraisal you may order a second FHA appraisal (advance payment required) but it is not likely to differ significantly from the original.

See Also Reverse Mortgage Frequently Asked Questions – Part 1

Author – Robert H. Irving, CSA®
Senior Reverse Mortgage Consultant

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What is a Home Equity Conversion Mortgage?

The HECM (heck-um) is a special type of FHA mortgage program that enables homeowners age 62 and over to benefit from the equity in their home with no repayment needed for as long as they continue to occupy the home as their primary residence

Who is eligible for a HECM?

You, and any co-borrowers, must be at least 62 years old and either own your home free and clear or have a mortgage balance that can be paid off at loan closing.  Your home must be a single-family or two-to-four unit dwelling.  Units in condominiums are also eligible if they meet FHA guidelines.  You must also agree to accept mortgage counseling from a HUD approved independent counseling agency.  Family members are encouraged to attend.  Call us for a referral to a counselor in your area.

How do Home Equity Loans and HECM loans differ?

With a Home Equity loan, you must begin to make monthly payments to repay the loan as soon as the loan is taken out.  You also must be able to prove that you have the monthly income to qualify for the home equity loan, and you may be required to re-qualify after the loan is taken out.  With a HECM loan, there are no monthly payments and no monthly income requirements for setting up the program…. ever!

Will I qualify for a reverse mortgage if I already have a conventional mortgage or a home equity loan… or both?

It’s OK to have a regular mortgage or home equity loan or both. Many borrowers have an existing mortgage or liens on the property. As long as you qualify for enough money to pay off the existing loans, you will be eligible for a HECM.

How much money can I borrow under a reverse mortgage plan?

The maximum amount that can be borrowed is based on a HUD formula that factors in the age of the youngest borrower, the interest rate, and the maximum claim amount.  The maximum claim amount is the lesser of the appraised value of your home or the maximum principal amount for a one-family residence that can be insured by FHA in your area. Currently $625,500 in most states.

What payment plans are available with a HECM?

You may choose from five different payment plans:

TERM:  You receive equal monthly payments for the fixed period of time selected by you.

TENURE:  You receive equal monthly payments for as long as you occupy your home as your principal residence.

LINE OF CREDIT: You may draw up to a maximum amount of cash at times and in amounts of your choosing as long as you occupy the home as your principal residence.

MODIFIED TERM: You may set aside a portion of your loan proceeds as a line of credit and receive the rest in the form of equal monthly payments for a fixed time period as specified by you.

MODIFIED TENURE: You may set aside a portion of your loan proceeds as a line of credit and receive the rest in the form of equal monthly payments for as long as you occupy the home as your principal residence.

How will the reverse mortgage payment amount be calculated?

The amount depends on the age of the youngest borrower, the interest rate, the maximum claim amount defined above, the amount of the monthly servicing fee, and the length of time that you will be receiving payments – for a fixed period or for as long as you live in your home.  The older you are, the larger your payments are likely to be.

Will HECM payments affect Social Security or Medicare benefits?

HECM proceeds will not affect eligibility for retirement, survivor, disability, or Medicare benefits payable under the Social Security Act.  However, eligibility for need-based programs, such as Supplemental Security Income (SSI) could be affected if advances are not spent in the month received.  Other state-administered programs such as Medicaid, AFDC, and food-stamps all have different eligibility requirements.  Therefore, we suggest that you speak with a benefits specialist.

Are fixed rate HECM loans available?

Yes, however there are some disadvantages.  Fixed rate HECM loans (1.) start out at a higher rate of interest and (2.) offer less money to senior borrowers (sometimes).  (3.)  Fixed rate products also require that borrowers take all money at closing.

Will I have to pay any fees to obtain a HECM loan?

Yes.  These fees and costs may be included in your loan balance so that you do not have to pay them in cash.  You pay an origination fee, ordinary closing costs, and an FHA mortgage insurance premium (2% up-front and a ½% annual FHA renewal premium on the outstanding balance).  A monthly servicing fee will also be charged each month.  This may also be financed into the loan balance, so you will not have to pay it in cash.  An FHA appraisal and home inspection fee is also required.  Ordinarily, this fee may also be rolled into the loan balance so that there will be no out-of-pocket initial expenses to worry about except the counseling fee of $125. Frequently, this fee may also be financed

Are there restrictions on the use of the reverse mortgage money?  What if I just want to buy a new car or pay tuition for a grandchild?

The lender does not ask any questions regarding the use of the loan proceeds.  This is your money, and how you spend it is completely up to you!

Will I have to sell or leave my home if the money I owe on the reverse mortgage exceeds the value of my home?

NO! As long as you continue to live in your home as your primary residence, you will never be asked to sell or move out of your home as long as you abide by the loan agreement which states that you will pay all property taxes and keep the property well maintained and properly insured. The FHA insurance you acquire in connection with the HECM covers any potential financial obligation to your lender.

Are there any special requirements to get a HECM?

You must agree to accept mortgage counseling from a Department of  Housing and Urban Development (“HUD”) approved counseling agency via phone or in person. This is provided to assist you in understanding the HECM loan program so that you can be comfortable in knowing whether or not the program is right for you. We encourage you to bring friends and family members to the session. FHA requires that you pay the fee (usually $125) direct to the agency that counsels you. Lenders may not reimburse this fee.

See Also Reverse Mortgage Frequently Asked Questions – Part 2

Author – Robert H. Irving, CSA®
Senior Reverse Mortgage Consultant

Subscribe to Reverse Mortgage Information by Email