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HECM - HUD reverse mortgage to purchase home or cash out equity

Posted on: 03rd Apr, 2004 01:38 am
If you're an older homeowner looking to purchase a primary home or convert the value of your home into cash, without having to make a monthly mortgage payment, try getting an HECM or Home equity conversion mortgage. The HECM is the only reverse mortgage insured by the Federal Housing Authority (FHA) and the Department of Housing and Urban Development (HUD). This article explains the basics of an HECM and highlights the following topics:

What are the eligibility criteria?

Unlike other mortgages, an HECM (HUD reverse mortgage) does not have any qualifying criteria regarding your income, credit history, and employment. In order to qualify for a home equity conversion mortgage, you need to satisfy the following criteria:
  • Age: You and any co-borrower(s) must 62 years or older.
  • Collateral: The home used as the collateral must be your primary residence. If you purchase a home using a home equity conversion mortgage, you need to occupy the property (as your primary residence) within 60 days of closing.
  • Mortgage balance: There should be no or low outstanding balance on any previous mortgage taken against your home. You should be able to pay off the balance at closing using the reverse mortgage proceeds.
  • Down payment/closing costs: If the loan is meant to purchase your home, make sure you have cash in hand to pay the difference between the HECM, the sales price, and closing costs for the property. The amount of down payment depends upon age of the buyer and the loan's interest rate.
  • Counseling session: Prior to applying for the loan, you need to attend a counseling session with a HUD-approved HECM counselor. The purpose of counseling is to educate consumers about how the reverse mortgage works so they can avoid scams and know their rights. To get HECM counseling, call 1-800-569-4287. You'll receive a certificate after having attended the counseling session. You need to show the certificate to your FHA lender at the time of applying for an HECM.
  • Property requirements: HUD and the FHA have several requirements each property must meet before you will be approved for a reverse mortgage. They are:
    • Property must meet FHA standards; any repair work can be paid for using the reverse mortgage.
    • Your property must be a single-family residence in a 1-to-4 unit dwelling.
    • It can be an FHA approved condominium or planned unit development (PUD).
    • Townhouses, mobile homes/manufactured housing are eligible.

How much can I borrow?

HECMs for the purchase of a primary residence have a maximum loan limit of $625,000. This means that even if your home is appraised for $1,000,000, the limit on the amount you can borrow (or LTV ratio) will be based on a value of $625,000 instead of $1,000,000. The maximum amount you can borrow depends upon:
  • Your age or the co-borrower's age, whichever is less
  • The lesser of the home appraised value or maximum loan amount that the FHA insures in your area
  • The current interest rate on your loan
You can borrow more if:
  • Appraised value of your home is larger
  • You or the youngest borrower are older than 62
  • The loan interest rate is lower

What interest rates are available?

Most HECM and reverse mortgages are available at adjustable interest rates tied to the US Treasury Security Index or the LIBOR Index. You may choose an interest rate that adjusts monthly or annually. Adjustable rate mortgages may have lifetime caps, therefore you may have to worry about accumulating too much debt over a certain period of time. However, there are FHA lenders offering fixed rate loans as well.

What are the loan costs?

The costs of taking out an HECM (FHA reverse mortgage) may be higher than traditional home loans. You need to pay the following fees:
  • Origination fee: This is the lender's fee for originating your loan. The maximum fee that a lender can charge you is capped at $6,000.
  • Closing costs: These include a wide range of fees including the appraisal fee, processing fees, discount points, etc. For further details, check out the closing costs usually required for getting a mortgage.
  • Servicing fee: This is the cost of servicing your loan. Servicing includes sending your account statements, forwarding your loan payments, and monitoring whether the insurance and taxes are being paid.
  • Upfront MIP: Mortgage Insurance premiums (MIP) are required for all FHA home-buying programs. An up-front premium of 1.50% of the loan amount is required to be paid at closing and can be financed into the mortgage. There is also a monthly MIP of 50% and a renewal premium of 5% each subsequent year.

How do I repay the loan?

Unlike traditional home loans, a FHA reverse mortgage does not require monthly payments as long as you occupy the property. The loan amount along with the accrued interest is paid off when the last surviving borrower passes away or sells the property. If you're undergoing medical treatment in a nursing home, the HECM gives you 12 consecutive months to stay there before payoff of the loan is required.

A reverse mortgage becomes payable if the borrower sells the house, the borrower dies, or the loan term ends. However, you're responsible for property taxes, homeowners insurance, utility bills, and other maintenance costs during the term of the loan. If you don't make these payments, your loan will become due.

What if the loan balance exceeds my home's value?

You or your heirs won't owe more than the value of your property if your loan balance exceeds the property value, and the MIP policy will help compensate for the difference. You will not be forced to sell or vacate property if your loan balance gets higher. Instead, you can continue to occupy the property provided you pay for homeowners insurance, property tax, and repair work on the home.

What if the home appreciates in value?

If the home appreciates in value during the loan term, you or your heirs (upon your death) will receive an amount equal to the difference between the amount of the loan and the home's value.

Can HECM affect Social Security and other benefits?

HUD reverse mortgage proceeds do not affect your Social Security or Medicare benefits because the amounts of these benefits are not based upon the total value of your assets. However, it can affect your eligibility for Supplemental Security Income (SSI) if your liquid assets exceed a certain limit. The best thing to do is to use your HECM advances in the month you receive them, otherwise they'll be considered as part of your liquid assets and can affect your chances of qualifying for SSI. Whether this renders you ineligible for Medicaid benefits depends on your state's laws.

The HECM program offers the highest loan amount and the lowest interest rate compared to other reverse mortgages. But while the interest accrued is not deductible on your income tax returns until you pay off the loan, either in part or whole, an HECM makes seniors financially independent by helping them access their home equity or purchase a home without the burden of monthly loan repayments.
has anything that has been done in Washington been a help in getting a reverse mortgage?
Posted on: 12th Aug, 2008 05:41 pm
Hi juanita,

You may be talking about the New Housing Bill which includes increase in reverse mortgage limits. Know more about it from http://www.mortgagefit.com/news/newhousingbill-reverseloanlimit.html .

Thanks,

Jerry
Posted on: 14th Aug, 2008 12:00 pm
Yes, the problem has been corrected. Prior to it being corrected, you could get a FHA-insured Reverse Mortgage in Washington, but only from a Federally Chartered National Bank. Mortgage Banks and Mortgage Brokers weren't allowed to originate them.
Posted on: 03rd Jul, 2009 10:45 am
If the home I want to purchase is $40,000.00, Howmuch will I need for a down payment and balance. Is there a balance I have to pay for the home?
Posted on: 21st Jul, 2009 03:02 pm
What are the birthdates of you and your spouse?
Posted on: 21st Jul, 2009 03:05 pm
I am 62 and single.
Posted on: 21st Jul, 2009 03:08 pm
Someone needed to know my birthday 8/16/46
Posted on: 21st Jul, 2009 03:11 pm
You would need to contribute $25,814.00 to purchase the home with a Reverse Mortgage. The amount homeowners have to contribute decreases as they grow older.
Posted on: 21st Jul, 2009 04:26 pm
I am 73 years old and single. I will soon buy a condominium for about $110,000 cash. This will be my primary residence.
My realtor recommends I have the property independently appraised before making an offer.
Q. When can I apply for a reverse-mortgage once I own this property?
Q. Will that appraisal be acceptable when I apply for a Home Equity Conversion Mortgage (HECM or HUD Reverse-mortgage)?
Q. For how long will that appraisal be acceptable to HUD?
Thank you.
Posted on: 09th Jan, 2010 12:28 pm
Q. When can I apply for a reverse-mortgage once I own this property?

Immediately, but it makes more sense to purchase the home with a Reverse Mortgage instead. You'd contribute $48,635.00 to the transaction and the Reverse Mortgage would contribute the other $61,365.00

Q. Will that appraisal be acceptable when I apply for a Home Equity Conversion Mortgage (HECM or HUD Reverse-mortgage)?

No. It'll be a different transaction, so you'd need a new Appraisal. However, you'd only need one Appraisal if you purchased the home with a HECM.

Also, since you're buying a condo, check with the HOA first and confirm they're approved for FHA financing. It's really important.
Posted on: 09th Jan, 2010 02:03 pm
Do I arrange for an appraisal before applying for reverse mortgage or does HUD conduct the appraisal after I apply?
Posted on: 10th Jun, 2010 07:21 am
Your Loan Officer will order the Appraisal, you're unable to order it yourself. Prior to ordering the Appraisal, your Loan Officer needs you to sign the Loan Application package, and you also need to attend HUD's mandatory Counseling session.
Posted on: 10th Jun, 2010 07:55 am
My husband is 63 BUT I am 57, if we do a HECM purchase of a home, and he passes away what will happen to me.
Posted on: 26th Jun, 2010 06:17 am
>>and he passes away what will happen to me.

The Reverse Mortgage would become due and you'd have to pay it back.
Posted on: 26th Jun, 2010 09:24 am
What if I want a reverse mortgage but do not want to spend the money unless I need it? I currently have a mortgage payment and can make the payments but don't know about the future. We have a lot of equity
Louise
Posted on: 04th Jul, 2010 04:56 pm
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