Reverse Mortgage

What is a HECM loan?

HECM stands for Home Equity Conversion Mortgage. A HECM is the FHA insured reverse mortgage that allows qualified homeowners 62 and older to access part of the value of their home. Home equity can be accessed in a number of ways and enables greater cash flow to the borrower. Imagine living in your home without a traditional monthly mortgage payment¹, or instead, enjoying monthly loan proceeds from the years you’ve invested in your home. After you get a reverse mortgage on your primary residence, repayment is not due until the home is sold, the last borrower passes away or permanently leaves the home. Borrowers also must keep the home in good condition, pay property taxes, and keep homeowner’s insurance coverage to avoid the loan becoming due and payable.

A reverse mortgage is a unique mortgage designed for homeowners 62 and older. You may enjoy access to part of the value of your home and the freedom and comfort of the home you’ve known for so many years. It’s your home, now you can put it to work for you.

Features, Benefits, and Qualifications

Reverse mortgage borrowers retain ownership and title to their home. It’s yours just as it was before, but now you may benefit from the equity that’s been building in your home for years. In addition, HECM (Home Equity Conversion Mortgage) reverse mortgage loans give you peace of mind since your home and property are the only assets that secure the loan.

HECM Loans are insured by the Federal Housing Administration (FHA). FHA requires a Mortgage Insurance Premium (MIP) to be collected at closing and during the life of the loan. These premiums are charged to the borrower’s loan balance. The upfront Mortgage Insurance Premium (MIP) is calculated using your home’s appraised value or a maximum of $970,800 (the 2022 national lending limit cap) and is charged at closing. The ongoing FHA insurance premiums are calculated using each month’s outstanding loan balance.

This insurance provides the following protections and peace of mind for borrowers and their children:

• The borrower(s) are not required to pay more than the home’s fair market value.
• If the loan balance exceeds the value of the home, FHA reimburses the lender for the difference when the estate sells the home.
• Payments made to the borrower by the lender are insured by FHA. If the lender is unable to continue making payments, the payments would be made by FHA.
• If the loan balance grows and exceeds the home’s present market value, the lender cannot take title. FHA ensures that borrowers can live in their home as long as basic loan obligations are met (homeowner’s insurance in force, property tax payments current, and the home is maintained in good condition).

In order to retain the home when the reverse mortgage becomes due, the heirs may choose to keep the home by paying 95% of the home’s appraised value, less customary closing costs and real estate commissions.

A reverse mortgage allows you to draw from the value in your home without having to sell it.

You live in a home that you’ve watched increase in value for years. You may find it difficult keeping up with bills and healthcare expenses. You’re faced with a dilemma: sell the house—your home, which really doesn’t have a price tag—or continue to live in it and watch your financial burden increase. Now imagine this dilemma resolved.

“My house has been my home for most of my life. I can’t leave, but I can’t afford to stay.”

A reverse mortgage loan allows you to draw on a portion of the value in your home without having to sell it and may allow you to receive monthly cash flow payments. The loan is repaid when you sell your home, the last borrower passes away, or you no longer live there as the principal residence.

You can use the loan proceeds as you wish: to enhance and extend your retirement, make home improvements, pay bills, etc. It’s all up to you.²

As a protection, all those seeking a reverse mortgage are required to obtain counseling (from an independent HUD-approved third-party counselor) prior to incurring any costs associated with the loan (other than the counseling fee). While proceeds from a reverse mortgage are not subject to personal income taxation, borrowers should seek tax advice on how proceeds may affect government needs-based programs such as Medicaid and Medi-Cal.²

^{¹This advertisement does not constitute financial advice. Please consult a financial advisor regarding your specific situation. There are some circumstances that will cause the loan to mature and the balance to become due and payable. Borrowers are still responsible for paying property taxes, homeowner’s insurance and maintaining the property to HUD standards. Failure to do so could make the loan due and payable. Credit is subject to age, income standards, credit history, and property qualifications. Program rates, fees, terms, and conditions are not available in all states and subject to change.}

^{²Borrowers should seek professional tax advice regarding reverse mortgage proceeds.}

Home Equity Conversion Mortgage / Reverse For Purchase

A reverse mortgage to purchase a property? How does it work?

A reverse mortgage purchase or HECM for purchase allows seniors age 62 or older to buy a new home with HECM loan proceeds. The primary benefit to the senior is that the transaction only involves one set of closing costs versus buying a home and obtaining a reverse mortgage thereafter, which would incur two complete sets of closing costs. Created by the Housing and Economic Recovery Act of 2008, this program became live on January 1, 2009. Qualified seniors must conform to all HECM requirements, all of the basic rules apply in addition to some new rules and regulations.

What Are The Basics?

• Can purchase existing 1 to 4 unit property
• Property must serve as the principal residence
• Once HECM purchase is complete, no additional liens are permitted (Lender in 1st position, HUD in silent 2nd)
• Must provide monetary investment at closing from an allowable funding source, see below for details
• Must occupy property within 60 days of closing
• Newly constructed properties must have a certificate of occupancy issued by the time the Home Equity Conversion Mortgage purchase loan is insured by FHA (‘endorsed’).

There are some differences between a HECM for Purchase and a Traditional HECM. The major differences concern the property types that are eligible, the cash required at closing, the involvement of a Real Estate Agent in the loan process, the recommendation of a professional home inspection, and certain closing costs.

HECM for Purchase Guidelines

Eligible Properties

Same as federally-insured reverse mortgages or Home Equity Conversion Mortgage loans.

Ineligible Properties

• Cooperative units
• Manufactured homes (in certain circumstances they may be eligible)
• Bed and breakfast properties, boarding houses

Selecting A Home For Purchase & Getting An Inspection

All seniors are strongly encouraged by HUD to get a home inspection from a licensed professional home inspector (This is suggested but not required)

• Evaluates the physical condition: structure, construction, and mechanical systems
• Identifies items that need to be repaired or replaced prior to the scheduled closing date
• Estimates the remaining useful life of the major systems, equipment, structure, and finishes
• Buyers should be at the inspection to ask questions about the condition and maintenance

Required Repairs

• Health and safety or structural integrity issues
• Must be completed prior to closing by the seller
• Include in a purchase agreement
• Buyer cannot put any money into repairs before they own the home

Writing An Offer

• Must state offer contingent on a satisfactory inspection conducted by a qualified inspector
• The borrower may want an attorney to review – increases costs but may be worth it
• The client may cancel the transaction at any time prior to closing but this could affect earnest money deposit

Closing Costs

Standard HECM closing costs plus:

• Recordation fees
• Transfer taxes
• Varies from state-to-state

Common Questions About the HECM For Purchase Loan

What Is The Monetary Investment Requirement?

At closing, HECM borrowers must provide a monetary investment which will be applied to satisfy the difference between the HECM principal limit and the sales price for the property, plus any HECM loan related fees that are not financed or offset by other allowable FHA funding sources. In other words, the proceeds from the reverse mortgage and any funds from the sale of the old property (or from the borrower’s savings) must be enough to purchase the new property outright. The difference between principal limit and sales price for the property also includes any HECM loan related fees that are not financed or offset by other allowable funding sources. Borrowers may provide larger investment amounts in order to retain a portion of HECM proceeds for future draws.

What Are Allowable Funding Sources?

• Their own money or money obtained from the sale of assets.
• Withdrawals from borrower’s savings or retirement account are acceptable.

Lenders will be required to verify the source of all funds prior to closing. A verification of deposit, along with the most recent bank statement, may be used to verify savings and checking accounts. If there is a large increase in an account, or the account was opened recently, the lender must obtain a credible explanation of the source of those funds. Such documentation must be provided in the FHA case binder. Failure to provide the necessary documentation may result in a notice of rejection and delay of endorsement.

What Funding Sources Are Ineligible?

• Loan discount points
• Interest rate buydowns
• Closing cost assistance
• Builder incentives
• Seller contributions or seller financing
• Credit card advances
• Secured or non-secured loans from another asset (car, home equity)

Borrowers may not obtain a bridge loan (also known as gap financing) or engage in other interim financing methods to meet the monetary investment requirement or payment of closing costs needed to complete the purchase transaction. This restriction includes subordinate liens, personal loans, cash withdrawals from credit cards, seller financing and any other lending commitment that cannot be satisfied at closing.

What Is The Role Of A Real Estate Agent?

Senior should consider a written agreement – you should include contingencies for the sale of the senior’s previous home, the home inspection, etc.

Other Things To Know About HECM for Purchase Loans

• There is no three day right of rescission, unlike the traditional HECM. The three-day right of rescission period is not applicable to HECM for Purchase transactions. Therefore, all initial advances may be disbursed on the day of closing by the settlement agent. However, FHA encourages lenders to seek their counsel’s opinion to assure compliance with Federal or State laws.
• Seller concessions are not applicable to reverse mortgages.
• Existing HECM borrowers who participate in a HECM for Purchase transaction are ineligible for a reduction of the upfront MIP and lenders must enter the transaction into FHA Connection as a new HECM.
• HUD-approved housing counseling agencies that have been approved to provide reverse mortgage counseling, must counsel those who anticipate using the HECM for Purchase option on all topics covered in this Mortgagee Letter and other HUD requirements and issuances.
• Lenders are required to ensure the property, when used as collateral for the HECM, meets the following property requirements:
  • 1) It is the borrower’s principal residence;
  • 2) Construction is complete and a certificate of occupancy or its equivalent has been issued by the time the loan is insured by FHA (‘endorsement’) or by the lender’s deadline, and
  • 3) Any construction loan financing for the property, which will serve as the collateral for the HECM loan, is satisfied and the HECM liens will be in a first and second lien position and, at the time of closing, no other liens against the property exist.

Property Flipping

To avoid cases of property flipping, lenders must take steps to ensure that:

• Only current owners of record may sell properties that will be financed using FHA-insured mortgages;
• Any resale of a property may not occur 90 or fewer days from the last sale to be eligible for FHA financing; and
• For resales that occur between 91 and 180 days where the new sales price exceeds 100% of the previous sales price, FHA will require additional documentation validating the property’s value.

Property Flipping Scams

If a lender suspects a senior has become a victim to a property flipping scam, the Processing and Underwriting Division of the local HOC should be contacted.

Complaints may be reported to HUD’s Inspector General Hotline at: HUD Office of Inspector General Hotline, GFI
451 7th Street, SW
Washington, DC 20410
Toll-free: 1-800-347-3735
TDD: (202) 708-2451

Listed below are the common myths followed by the facts of reverse mortgages that will bring clarity and assist you in making the most informed decision.

Reverse Mortgage Myths and Facts

Myth: You immediately sign over ownership to your home.
Fact: You retain title to your home as long as you meet the loan guidelines and requirements such as: maintaining the property, paying all property charges such as property taxes, homeowners insurance, flood insurance, and homeowners association dues (if applicable), and avoiding extended absences from the home longer than six months.¹

Myth: If you take out a reverse mortgage loan your children won’t be left with any of the home equity.
Fact: While the amount of equity typically decreases over time with a reverse mortgage, it doesn’t mean there will be no equity left when the last borrower dies. There are several factors that go into how much equity will be left, such as home appreciation, length of the loan, and optional monthly payments. There can still be equity left for your children.

Myth: Your children will be responsible for repaying the loan when you die
Fact: A reverse mortgage is a non-recourse loan, meaning that the lender can only be repaid from the proceeds of the sale of the home and not more than the value of the home. That means even if the home decreases greatly in value, the maximum repayment amount can only be up to the value of the home. While your heirs will not be responsible for the loan repayment, they will still have the option to refinance the loan to purchase it for themselves.

Myth: A reverse mortgage requires that you make monthly mortgage payments.
Fact: While you can choose to make mortgage payments, they are not required with a reverse mortgage. The borrower is still responsible to maintain the property, pay property taxes, homeowners insurance, flood insurance, and homeowners association dues (if applicable).¹

Myth: You must have your first mortgage paid off before you can qualify for a reverse mortgage.
Fact: While any debt on your home’s title must be paid off at closing and you must have adequate equity in the property, it is not required that you own your home “free and clear” before getting a reverse mortgage.Reverse mortgages are often misunderstood and often require education in order to understand the myths vs. facts.

Myth: You are not allowed to sell your home if you have a reverse mortgage.
Fact: You can sell your home if you wish and – just like any other mortgage loan – you must pay off the reverse mortgage at closing. There are also no prepayment penalties if you choose to pay off your loan early or make loan payments.

Some Additional HECM Loan / Reverse Mortgage Loan Facts

• Many retirees use a reverse mortgage.
• A reverse mortgage allows older homeowners to access a portion of the value of their home.
• A reverse mortgage is a specialized loan for homeowners 62 and older.
• A reverse mortgage is eligible only for the borrower’s primary or principal residence.
• Reverse mortgages that are FHA-insured (Home Equity Conversion Mortgages) are insured by the Federal Housing Administration providing protection for both borrowers, lenders and beneficiaries.
• HUD counseling (from an independent HUD-approved third-party counselor) is required prior to the borrower incurring any costs associated with the loan.
• The cash or proceeds you receive from a reverse mortgage typically are not subject to individual income taxation. However, we suggest you consult your tax advisor to provide guidance for your particular situation.²
• It is not a government grant, but a loan that is repaid in the future when the home is sold or the last borrower dies or permanently leaves their residence.²
• Reverse mortgage proceeds could affect government needs-based programs such as Medicaid and Medi-Cal. Those receiving such benefits should consult a professional before obtaining a reverse mortgage.
• A reverse mortgage loan is secured by a mortgage on the home and failure to comply with loan terms could result in foreclosure.
• It’s a specialized loan. However, program rates, fees, terms, and conditions are not available in all states and are subject to change.

^{¹There are some circumstances that will cause the loan to mature and the balance to become due and payable. The borrower is still responsible for paying property taxes, homeowner’s insurance and maintaining the property to HUD standards. Failure to do so could make the loan due and payable. Credit is subject to age, income standards, credit history, and property qualifications. Program rates, fees, terms, and conditions are not available in all states and subject to change.}

^{²Borrowers should seek professional tax advice regarding reverse mortgage proceeds.}

The Process of Getting a HECM / Reverse Mortgage Loan

Awareness
You may have heard about the reverse mortgage loan on TV, on the radio, online, by receiving a mailer, or you did your own research.

Education
Meeting with a qualified Mortgage Loan Originator is key. This is where you learn about your specific numbers, what you qualify for, and receive an analysis of your particular situation.

Counseling
Counseling is required from an independent third-party, HUD-approved counseling agency, for all reverse mortgage borrowers. Typically this fee is paid by the borrower. Consult with your Reverse Mortgage Loan Originator and make sure you complete this as soon as possible. Many times counseling can be completed over the telephone. You will receive two certificates; one to keep and the other to send to our office.

Action / Application
Meet with your Mortgage Loan Originator and decide if a reverse mortgage is right for you. Our reverse mortgage professionals may meet with you at our office, your home, or by phone to help guide you through the application. You will be left with a complete copy of ALL the documents for you and your trusted financial advisors (i.e. CPA or attorney) or family member(s) to review.

Financial Assessment
To help ensure the long-term success of the HECM loan over time, HUD requires a financial review of each applicant’s credit history, property tax payments and other credit factors that will be evaluated to measure a borrower’s willingness and financial capacity to meet the ongoing obligations of the loan.

The Appraisal
Upon receiving your HUD counseling certificate we will contact you to arrange for an appraisal of your property. The appraisal is paid by the borrower. Reverse mortgages use a full FHA appraisal. The value of your home is based on what comparable properties in your neighborhood have sold for recently.

Processing
The lender will begin to process your paperwork. This process includes the appraisal, title report, and checking the balance of any liens/mortgages to be paid. Also, verification of income and other credit factors are gathered at this time. We will be in contact regularly during this time.

Underwriting
When the processing and all paperwork is complete, we forward your file to the loan underwriter to determine if the loan will be approved and will work to satisfy any conditions/requirements needed to close the loan.

Closing & Funds Disbursed
If your loan has been approved by underwriting we will contact you to arrange for the signing of your final loan documents. At this time we will confirm your payment plan or partial lump sum (how you want to receive your money). Once you’ve signed the closing documents you have three business days to cancel the loan if you should choose to do so. After the cancellation (rescission) period has passed, your funds are distributed based on the payment option you chose at closing. HECM for Purchase loans do not have a rescission period. See HECM for Purchase Guidelines for more information.

*These FAQs are not from HUD or FHA and have not been approved by HUD, FHA or any federal government.

How Do I Qualify For A Reverse Mortgage?

To become eligible for a reverse mortgage, you must be at least 62 years old and own your home. You must have equity in the house to pay off any outstanding balances, and your home must be occupied as your principal residence. All applicants are subject to a financial assessment to determine their financial capacity and willingness to pay obligations as part of the qualification process.

How Much Money Could I Get?

The amount of money that a lender will loan depends on how old you are at the time of closing, how much your house is worth, the total amount of liens, and interest rates. The payoff of your existing mortgage and mandatory obligations along with the payment option chosen will affect the amount of money you will receive. HUD limits borrowers to using 60% of the available money (after closing costs & fees) in the first year. The remaining funds are accessible beginning year two. This maximum disbursement limit set by HUD allows for the GREATER of:

1. 60% of the Principal Limit (amount of money available to the borrower in all years of the loan) in the first twelve months of the loan from your closing date OR…
2. The sum of Mandatory Obligations (existing mortgage payoff, tax liens, closing costs, mortgage insurance premium) plus 10% of the Principal Limit. This total cannot exceed the total Principal Limit at the time of loan closing.

How Do I Receive My Money?

There are several different options to choose from. You can take the money in a lump sum (up to HUD’s first-year maximum withdrawal)*, set up a line of credit, monthly payment, or a combination of all three. In the first year, the Line of Credit or monthly Tenure Payments or monthly payments cannot exceed 60% of the Principal Limit. After the first year, the available Line of Credit or Tenure/Monthly payments will be increased when applicable.

* Fixed interest rate reverse mortgages only allow for the Single Disbursement Lump Sum payment plan.

What Costs Are Associated With A Reverse Mortgage?

The fees and cost of a reverse mortgage are based on a number of items. For example, an origination fee is paid to the broker/lender, a MIP (mortgage insurance premium) is paid to FHA on the Home Equity Conversion Mortgage (HECM), an appraisal fee, a flood certification fee, a document preparation fee, title, settlement, and escrow fees. All costs are clearly shown on the Good Faith Estimate (GFE). Monthly servicing fees could apply.

What Are The FHA Mortgage Insurance Premium Charges?

FHA requires a Mortgage Insurance Premium (MIP) to be collected at closing and during the life of the loan. These premiums are charged to the borrower’s loan balance. The upfront Mortgage Insurance Premium (MIP) is calculated using your home’s appraised value or a maximum of $970,800 (the 2022 national lending limit cap) and is charged at closing. The ongoing FHA insurance premiums are calculated using each month’s outstanding loan balance.

Is It Required That I Receive Counseling Before Getting A Reverse Mortgage?

Yes. Counseling is required with an independent third party HUD-approved counselor to protect borrowers from receiving incorrect information about reverse mortgages. The lender must be in receipt of the counseling certificate before they can close the loan. To locate a reverse mortgage counselor near you, contact your Mortgage Loan Originator or your local HUD office.

Do I Get Taxed On The Money I Receive From My Reverse Mortgage?

While the proceeds you receive from a reverse mortgage are typically not subject to individual income taxation, you will need to consult your tax advisor.

Do I Have To Pay Any Fees To The Reverse Mortgage Lender During The Course Of My Loan?

A reverse mortgage was created so borrowers don’t have to pay most fees during the course of the loan. Typical upfront costs are for the appraisal and HUD-approved reverse mortgage counseling (some agencies waive counseling fees at their discretion). However, there may be a monthly servicing fee associated with reverse mortgages (which will be financed and added to the loan balance). For more information on the service set-aside, please talk to your Mortgage Loan Originator.

Resources

AARP free information on reverse mortgages
Phone: 1-800-209-8085

The Consumer Financial Protection Bureau (CFPB) Consumer Lookup
http://www.nmlsconsumeraccess.org/

Housing Counseling Clearinghouse
Phone: 1-800-569-4287

The Eldercare Locator: Local Resources for Older Adults
http://www.eldercare.gov
Phone: 1-800-677-1116

Federal Trade Commission (FTC) to report possible fraud
http://www.ftc.gov
Phone: 1-877-FTC-HELP (1-877-382-4357)

National Council For Aging Care
http://www.aging.com/
Phone: 1-877-664-6140