Reverse Mortgages for Seniors FHA's Home Equity Conversion Mortgage (HECM)

How FHA's Reverse Mortgage Program Works
Common Questions About FHA Reverse Mortgages

Looking for housing options for you, an aging parent, relative, or friend? Do some research first to determine what kind of assistance or living arrangement you need – is a reverse mortgage right for you?

Senior homeowners age 62 and older can use FHA-insured reverse mortgages to convert the equity in their homes into monthly streams of income and/or a line of credit to be repaid when they no longer occupy the homes. The loan, commonly known as Home Equity Conversion Mortgage or HECM, is with by a lending institution such as a mortgage lender, bank, credit union or savings and loan association. Homeowners are required to receive consumer education and counseling by an approved HECM counselor so they can be sure this program meets their needs.

HECM housing counselors will discuss program eligibility, financial implications and alternatives to obtaining a HECM plus provisions for the mortgage becoming due and payable. Upon the completion of HECM counseling, you as a homeowner should be able to make an independent, informed decision of whether this product will meet your needs.

Homeowners who meet the eligibility criteria can complete a reverse mortgage application by contacting a FHA-approved lending institution such as a bank, mortgage company, or savings and loan association. If you need assistance locating a FHA-approved lender, you can request a listing of FHA-approved lenders from the HECM counselor or use HUD's searchable listing.

Borrower Requirements:
• Must be age 62 years of age or older
• Must own your property
• Live in your property as primary residence
• Participation in a consumer information session given by a HUD-approved housing counseling agency.

Mortgage Amount Based On:
• Age of the youngest borrower if more than one
• Current interest rate
• Lesser of appraised value or the FHA insurance limit

Financial Requirements:
• No income or credit qualifications are required of the borrower
• No repayment as long as the property is the primary residence
• Closing costs may be financed in the mortgage

Property Requirements:
• Single family home or 1-4 unit home with one unit occupied by the borrower (which can also be FHA-approved condominiums or manufactured homes and leased land)
• Meet FHA property standards and flood requirements

How FHA's Reverse Mortgage Program Works -

Homeowners 62 and older who have paid off their mortgages or have only small mortgage balances remaining, and are currently living in the home are eligible to participate in FHA's reverse mortgage program. The program allows homeowners to borrow against the equity in their homes. Homeowners can select from five payment plans:

• 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 in installments, at times and amounts of borrower's choosing until the line of credit is exhausted.
• Modified Tenure - combination of line of credit with monthly payments for as long as the borrower remains in the home.
• Modified Term - combination of line of credit with monthly payments for a fixed period of months selected by the borrower.

Homeowners whose circumstances change may be able to restructure their payment options for a nominal fee of $20. Please consult your lender for more information.

Unlike ordinary home equity loans, an FHA reverse mortgage does not require repayment as long as the home is the borrower's principal residence. Lenders recover their principal, plus interest, when the home is sold. If any home equity remains after sale, the remaining value of the home goes to the homeowner, estate or heirs. You can never owe more than your home's value.

If the sales proceeds are insufficient to pay the amount owed, HUD will pay the lender the amount of the shortfall. HUD's Federal Housing Administration (FHA) collects an insurance premium from all borrowers to provide this coverage.

The amount a homeowner can borrow depends on their age, the current interest rate, other loan fees and the appraised value of the home or the FHA's mortgage limits for the area, whichever is less. Generally, the more valuable your home is, the older you are, and the lower the interest, the more you can borrow.

For example, based on a loan with interest rates of approximately 9%, and a home qualifying for $100,000, a 65-year-old could borrow up to 22% of the home's value; a 75-year-old could borrow up to 41% of the home's value; and, an 85-year-old could borrow up to 58% of the home's value. The percentages do not include closing costs because these charges vary.

There are no asset or income limitations on borrowers receiving FHA's reverse mortgages.

There are also no limits on the value of homes qualifying for an FHA reverse mortgage. The value of the home will be determined by an appraisal. However, the amount that may be borrowed is derived from the lower of the appraisal amount or FHA mortgage limit for the area, which varies from $200,160 to $362,790.

For Alaska, Guam, Hawaii and the Virgin Islands, the FHA mortgage limits may be adjusted up to 150% of the ceiling depending on the area. The FHA limits usually increase each year. As a result, owners of higher-priced homes can't borrow any more than owners of homes valued at the FHA limit.

FHA's reverse mortgage program collects funds from insurance premiums charged to the homeowners. Homeowners are charged an upfront insurance premium which is 2% of the maximum claim amount that may be borrowed plus a .5% annual premium which is paid on a monthly basis for the life of the loan.

Common Questions About FHA Reverse Mortgages -

What is a reverse mortgage?

A reverse mortgage is a special type of home loan that lets a homeowner convert a portion of the equity in his or her home into cash. The equity 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 no longer uses the home as the principal residence. FHA's reverse mortgage provides these benefits, and it is federally-insured as well.

Can I qualify for an FHA reverse mortgage?

To be eligible for a FHA reverse mortgage, FHA requires that you (the borrower) be a homeowner, 62 years of age or older; own your home outright, or have a low mortgage balance that can be paid off at the closing with proceeds from the reverse loan; and live in the home. You also must receive consumer information from a HUD-approved counseling agency before obtaining the loan. You can contact the Housing Counseling Clearinghouse on (800) 569-4287 to get the name and telephone number of an approved counseling agency and a list of FHA approved lenders within your area.

Can I apply if I didn't buy my present house with FHA mortgage insurance?

Yes. It doesn't matter if your earlier mortgage was not insured by FHA. Your new FHA reverse mortgage will be a new FHA-insured mortgage loan.

What types of homes are eligible?

Your home must be a single family dwelling or a two-to-four unit property that you own and occupy. Townhouses, detached homes, units in condominiums and some manufactured homes are eligible. Condominiums must be FHA-approved. Call 1-800-CALL-FHA and ask if your condominium project is FHA-approved. Don't get discouraged if it isn't, there is still an alternative. Ask your lender if it is possible for to qualify your project under the Spot Loan program. Do not sign any papers until you are certain that your project qualifies.

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 in relation to debt to qualify for the loan, and you are required to make monthly mortgage payments. The reverse mortgage is different because 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 or the FHA's mortgage limits for your area, whichever is less. Generally, the more valuable your home is, the older you are and the lower the interest, the more you can borrow. You don't make payments, because the loan is not due as long as the house is your principal residence. Like all homeowners, you still are required to pay your real estate taxes, hazard insurance and other property charges. Unlike a traditional second mortgage, with an FHA-insured HECM, you cannot be foreclosed or forced to vacate your house because you don’t make your principal and interest payments.

Can the lender take my home away if I outlive the loan?

No! You do not need to repay the loan as long as you or one of the borrowers continues to occupy the property as the primary residence, keep the taxes and insurance current and perform the other obligations of the mortgage.

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

When you sell your home or no longer use it for your primary residence, 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. None of your other assets will be affected by the FHA's reverse mortgage loan. This debt will never be passed along to the estate or heirs.

How much money can I get from my home?

The amount you can borrow depends on your age, the current interest rate, and the appraised value of your home or FHA's mortgage limits for your area, whichever is less. Generally, the more valuable your home is, the older you are, and the lower the interest, the more you can borrow.

Should I use the services of a firm that will give me the name of a lender for a “small percentage” of the loan?

FHA does not recommend using an estate planning service, or any service that charges a fee simply for referring a borrower to a lender. FHA provides this information without cost. HUD-approved housing counseling agencies are available (for free or at minimal cost) to provide consumer education information, counseling, and a listing of HUD-approved lenders for free. Call toll-free (800) 569-4287 for the name and location of a HUD-approved housing counseling agency near you.

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 number of months selected.
• Line of Credit - unscheduled payments or in installments, at times and amounts of your choosing until the line of credit is exhausted.
• Modified Tenure - combination of line of credit and monthly payments for as long as the borrower remains in the home.
• Modified Term - combination of line of credit and monthly payments for a fixed period of months which you choose