Frequently Asked Questions about HUD's Reverse Mortgages
The Home Equity Conversion Mortgage (HECM) is the FHA insured 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.
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 you built up over years of making mortgage payments can be paid to you. However, unlike a traditional home equity loan or second mortgage, HECM borrowers do not have to repay the HECM loan until the borrowers 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 loan and the sales price plus closing costs for the property you are purchasing.
2. Can I qualify for FHA insured HECM?
To be eligible for a FHA HECM, the FHA requires that you be 62 years of age or older, own your home, and have sufficient income to pay your property taxes, insurance, and association dues if any. You are also required to go through a counseling session with an independent agency approved by the government before applying for a reverse mortgage. You can get a list of at least 10 approved counseling centers from our office.
3. What types of homes are eligible?
To be eligible for the FHA HECM, your home must be a single family home or a 2-4 unit home with one unit occupied by the borrower. HUD-approved condominiums and manufactured homes that meet FHA requirements are also eligible.
4. What are the differences between a reverse mortgage and a home equity loan?
With a home equity line of credit the borrower must make monthly payments of at least the interest on the outstanding balance. After 10 years a monthly payment of both principle and interest is required and the line is usually frozen. After that no more funds are available even though the line has not been maxed out. A reverse mortgage is different in that there are no monthly principal and interest payments that have to be made and the line is not frozen until all loan proceeds have been used. There is no required monthly payment to be made but you can pay the loan down if you choose. With a reverse mortgage, you are required to pay real estate taxes, hazard insurance premiums, and maintain the property in reasonable condition.
5. Will we have an estate that we can leave to heirs?
When the home is sold or no longer used as a primary residence, the cash, interest, and other HECM finance charges must be repaid. All proceeds beyond the amount owed belong to your spouse or estate. This means any remaining equity can be transferred to heirs. No debt is passed along to the estate or heirs.
6. How much money can I get from my home?
The amount varies by borrower and depends on:
- Age of the youngest borrower or eligible non-borrowing spouse
- Current interest rate; and
- Lesser of appraised value or the HECM FHA maximum claim amount of $636,150. In the event of a purchase the available loan amount is based on the sales price or appraised value to a maximum of $636,150.
If there is more than one borrower and no eligible non-borrowing spouse, the age of the youngest borrower is used to determine the amount you can borrow.
7. Who owns the home?
A reverse mortgage has the same effect as a regular mortgage. The lender has a lien which eventually has to be paid off, but YOU still own your home.
8. Can you ever owe more than your home is worth?
No! If your home is sold in an arm's length transaction for market value and the proceeds are less than the loan amount due, any deficit is covered by the FHA insurance.
9. Are there safeguards for the seniors?
The vast majority of reverse mortgages are FHA insured loans. The terms and provisions are generally established by HUD, a department of the U.S. government. Homeowners must go through independent counseling with an agency approved by the government before they can apply for a reverse mortgage. Regulations have been passed to make the process as transparent as possible and protect seniors from predatory lenders. And, you can never owe more than the value of your home.
10. Are Reverse Mortgages expensive?
Reverse mortgages have most of the same closing costs as regular mortgages. FHA insured reverse mortgages require mortgage insurance. Every situation is different so interested parties should request a quote to see clearly whether the costs are in line.
There are many factors to consider when contemplating a reverse mortgage.
- Will it affect estate taxes?
- What is the optimal way to structure loan options for the best long term financial outcome?
- Are there changes coming to the programs which could adversely or beneficially affect me?
The principals at Anchor Funding along with our contacts at other financial professional organizations (CPAs, estate attorneys and financial planners) can help with these questions.