Imagine being mortgage-free or having access to tax-free money that can be used to cover any one of life’s major expenses?
For eligible American homeowners aged 62 years or older, this can be a reality thanks to Home Equity Conversion Mortgages (HECM’s). Backed by the Federal Housing Administration (FHA), these reverse mortgage programs enable seniors to take out some of the equity in their homes and even choose how they withdraw the money.
For those who are comfortably able to make their mortgage payments and have other assets and equity, a reverse mortgage might not make a lot of sense. But for those who are strapped for cash and have plenty of equity in their homes, an HECM can help them access otherwise unavailable money that can be used as they see fit.
What Exactly is an HECM Reverse Mortgage?
This reverse mortgage program is a specialized type of home loan that allows eligible candidates to convert a portion of the equity in their homes into liquid cash. Any equity that has been built up during the years of ownership can then be paid out to the borrower and be used in a variety of ways, including purchasing a primary home.
The difference between an FHA-backed HECM and a typical home equity loan is that the HECM loan doesn’t have to be paid back until the borrower is either unable to meet the criteria for the program or the home is no longer considered the borrower’s principal residence.
As long as the borrower lives in the home, the majority of the loan proceeds will typically be paid out over time instead of upfront, and with no repayment obligations. Any upfront costs of an HECM – including origination fees, appraisal fees, and title insurance – are typically included in the mortgage with no cash expenditures required from the borrower.
The lender involved pays the borrower, and the reverse mortgage balance increases while accruing interest and fees. Lenders are paid back when the borrower either sells the home or dies. The FHA pays the lender the difference if the sale price of the home is less than the loan amount.
Eligibility Requirements For HECM Approval
Age is not the only requirement needed to qualify for approval for an HECM reverse mortgage program. In addition to being aged 62 or older, homeowners must outright own their homes or be very close to fully paying off their mortgages which can be paid off with the proceeds from the reverse mortgage.
Since the home will still be subject to property taxes and insurance, among other things, candidates must also have the financial means to comfortably cover ongoing expenses. Last but not least, the home in question must be deemed the borrower’s primary residence.
As far as the home is concerned, it must be a single family home or a property with between two to four units, one of which must be occupied by the borrower. Manufactured homes that meet FHA requirements and condos that are HUD-approved also qualify.
Payout Options From an HECM Reverse Mortgage
There are various ways that borrowers can get paid out with an HECM, including the following:
- Lump sum payment at mortgage closing
- Equal monthly payments
- Line of credit
- A combination of the above three
What Happens When the Borrower Sells the Home or Passes Away?
If the home is sold or is no longer being used as a primary residence, the money and interest will have to be repaid. The borrower’s estate or spouse will receive the equity in the home if the borrower dies or sells the property. The equity is calculated using the net property value after all transaction costs have been deducted, minus the balance remaining on the HECM.
The borrower’s estate can obtain title to the home after the borrower passes away by paying off the HECM debt. If the property value exceeds the balance remaining on the debt, there are no issues that need to be dealt with. On the other hand, if the property value does not cover the debt balance, it’s up to the estate to assume this debt or not.
Is There a Risk of Losing the Home Under an HECM Reverse Mortgage?
Thanks to recent regulatory changes made by the U.S. Department of Housing and Urban Development (HUD), HECM reverse mortgages come with more safety measures today than they did in the past. HECM reverse mortgages give seniors the opportunity to tap into a part of their home equity to get rid of their monthly mortgage payments and use tax-free funds without having to use other retirement resources.
The only risk associated with a reverse mortgage has to do with the borrower being unable to meet their contract’s obligations, which is no different than a typical mortgage. If there are any defaults on specific obligations, such as paying property taxes and insurance, the borrower will be considered in default and could have their house placed under foreclosure. But at the end of the day, borrowers have total control over any risks assumed with an HECM.
The Bottom Line
Reverse mortgages are not for everyone, but for specific individuals, they can prove to be very valuable. Seniors who are sitting on a lot of home equity and are receiving a very small monthly income may find an HECM reverse mortgage very helpful at freeing up money that they otherwise wouldn’t have to continue living a comfortable life in their Golden Years.