HECM: Home Equity Conversion Mortgages
An HECM loan is the Federal Housing Administration’s reverse mortgage program. An HECM reverse mortgage enables the homeowner to withdraw some of the equity in their home with limitations or to withdraw a single disbursement lump-sum payment at the time of mortgage closing. The HECM loan may also be used to purchase a primary residence.
HECM loans are “non-recourse” loans. The FHA is responsible for paying the lender for any difference between the total loan amount and the amount for which the mortgaged property is actually sold – extra insurance covers that risk.
Initial Draw Limitations on an HECM Mortgage
There is a limit on the amount of money that can be withdrawn in the first year of borrowing. Of the amount you are eligible to withdraw (for example, $100,000), the maximum you may take at closing is 60 percent ($60,000) in the first year.
Exceptions to this limitation include those who have an existing mortgage or other lien on the property exceeding the 60 percent limit. Borrowers must pay off these “mandatory obligations” before qualifying for the reverse mortgage. You can withdraw enough to pay off these obligations, plus another 10 percent of the maximum allowable amount (another $10,000 if you were eligible for $100,000).
Single Disbursement Lump Sum Option – Fixed Rate Program
The HECM program provides the higher of 60% of their Principal Limit or Mandatory Obligations, plus 10% cash up to the Principal Limit. This can be a good option if you are borrowing most of your reverse mortgage proceeds and prefer a fixed rate of interest.
With this option, however, borrowers may not access additional funds at a later time. The lump sum disbursement is one-time-only. Borrowers who need more funds after choosing the “mini” option would need to refinance into a new reverse mortgage. This option provides the borrower with some flexibility based on his or her individual financial needs.
HECM for Purchase
HECM for Purchase allows seniors, age 62 or older, to purchase a new principal residence using loan proceeds from the reverse mortgage. Designed to allow seniors to purchase a new principal residence and obtain a reverse mortgage within a single transaction, the program enables senior homeowners to relocate to other geographical areas to be closer to family members or downsize to homes that meet their physical needs. Get more information about the HECM for Purchase loan program.
Mortgage Insurance Premiums (“MIP”)
Under the current rules for HECM loans, if the borrower does not take more than 60 percent of the available funds in the first year, the upfront MIP is 0.50 percent of the appraised value of the home, up to a maximum home value of $625,500. If more than 60 percent is taken, the upfront MIP is 2.50 percent.
The annual MIP is 1.25 percent of the outstanding loan balance.
HECM loan documents now ensure that the “due and payable” status of the loan is deferred until the death of the last surviving, non-borrowing spouse. Prior to this provision, non-borrowing spouses had to either sell or refinance the home to pay off the HECM loan. This left non-borrowing spouses who were not able to refinance with no other option but to sell the home.
Loans originated on or after August 4, 2014 allow non-borrowing spouses, including common law spouses if recognized by state law, to continue living in the home after their spouse passes away, with no requirement to refinance or sell the property. However, to be eligible for this provision, the spouse will have to:
- have been the spouse of the HECM borrower at the time of the loan closing,
- have remained their spouse for the duration of the borrowing spouse’s lifetime,
- have been disclosed at origination and have occupied, and continue to occupy, the home for the life of the HECM loan
Applicants with non-borrowing spouses should talk to David Chee about this HECM loan provision in further detail.
With FHA HECM loans, the homeowner is first required to attend a counseling session with a licensed Reverse Mortgage counselor. Information and advice is given to the homeowner based on his/her budget and individual reasons for wanting a reverse mortgage. Visit the HECM reverse mortgage Counseling page.
David Chee can answer the most puzzling of reverse mortgage questions. Get a free, customized loan quote or call (800)967-3575 today.