FAQ
Reverse Mortgage Frequently Asked Questions
Here are a few of the most frequently asked questions about the Home Equity Conversion Mortgage:
Q: What is a Home Equity Conversion Mortgage (“HECM”)?
A: 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
Q: Who is eligible for a HECM?
A: 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.
Q: How do Home Equity Loans and HECM loans differ?
A: 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!
Q: What if I already have a mortgage or a 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.
Q: How much money can I borrow?
A: 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.
Q: What payment plans are available with a HECM?
A: 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.
Q: How will the paymet amount be calculated?
A: 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.
Q: Will HECM payments affect Social Security or Medicare benefits?
A: 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.
Q: Are fixed rate HECM loans available?
A: Yes, however there are some disadvantages. Fixed rate HECM loans (1.) start out at a higher rate of interest and (2.) sometimes offer less money to senior borrowers. (3.) Fixed rate products also require that borrowers take all money at closing.
Q: Will I have to pay any fees to obtain a HECM?
A: 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
Q: Are there any restrictions on the use of the money? What if I just want to buy a new car or take a trip each year to visit my grandchildren?
A: 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!
Q: Will I have to sell or vacate my home if the money I owe on the loan exceeds the value of my home?
A: 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.
Q: Are there any special requirements?
A: 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. Contact us for referral to a counselor near you. FHA requires that you pay the fee (usually $125) direct to the agency that counsels you. Lenders may not reimburse this fee.
Q: May I switch payment plans in the future?
A: Yes, for a nominal fee (currently $25), you may switch payment plans at any time.
Q: Will my heirs/children owe anything to my mortgage lender if I die?
A: Upon your death, the HECM loan balance becomes due and payable. 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 heirs owe 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.
Q: If my home’s value appreciates during the mortgage term, who will be entitled to that money?
A: 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.
Q: What if I decide to sell my home?
A: If you choose to sell your home, the outstanding loan balance becomes due and payable at settlement. You or your estate will receive any proceeds exceeding the loan balance.
Q: If I decide to pay off my loan is there a prepayment penalty?
A: There is no prepayment penalty. You may pay back the loan anytime.
Q: Can I sell my home to my children and continue to live in it?
A: 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 owners.
Q: What is the Federal National Mortgage Association’s (“Fannie Mae) role in the HECM program?
A: Fannie Mae has agreed to purchase all adjustable rate HECM loans from lenders who originate them. They provide an active wholesale market for the securities.
Q: Where do I have to go to apply for my loan? To close my loan?
A: We come to you. Both the application and the closing are done in the comfort of your own home. Call us for an appointment or more information.
Q: Where is my loan processed? Does that make a difference?
A: Your loan is processed locally at our Operations Center. Your personal loan officer monitors daily progress and insures that your loan will be completed accurately, rapidly – usually within about thirty (30) days of application.
Q. Are all reverse mortgage loan originators fully licensed by my state?
A: Only state regulated loan originators are required to be licensed by the state. 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.
Q. Who determines the value of my home?
A. 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 attempting to arrive at a reasonable, 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.
Author – Robert H. Irving, CSA®
Senior Reverse Mortgage Consultant
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