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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.
You'd select the "credit line" option. That option enables you to keep your proceeds in the form of equity in a credit line. You'll access your cash by via your Servicing Department, and the really nice thing about a credit line is it grows. Even if your house is losing value, the credit line is growing. The growth rate for credit lines is half a percent above the note rate.
Posted on: 05th Jul, 2010 07:41 am
The home I wish to get a Reverse Mortgage on is not my only residence. I spend half the year snowbirding in another state and own a small apt there. For the past 7 yrs, I filed income tax in the other state. I bought the home I want to get the RM on in 1973 and have spent all of the current year in it. Have just changed drivers license back to this state. Car tags are also this state. Is this now my primary residence and how long must it be primary to apply for a RM?
Posted on: 02nd Nov, 2010 01:10 pm
>>Is this now my primary residence and how long must it be primary to apply for a RM?

Yes. You won't have any problem getting a Reverse Mortgage now.
Posted on: 02nd Nov, 2010 06:22 pm
Posted on: 23rd Feb, 2011 05:00 pm

Reverse mortgage can be used to buy a new home. You should contact your lender and apply for a reverse mortgage to buy the property. However, immediately after a bankruptcy filing, you may not qualify for a loan.

Posted on: 23rd Feb, 2011 11:31 pm
Yes, it can be done - I just did one like that. You can start it before the bankruptcy is discharged, but you can't sign the final papers until the bankruptcy has been officially discharged.
Posted on: 24th Feb, 2011 11:58 am
If the money from the reverse runs out what will happen?
Posted on: 26th Mar, 2011 11:09 pm
Hi Guest,

You won't be liable for paying off the reverse mortgage unless you leave or sell off the property. So, as far as I know, though the money runs off, the lender won't come after you to collect the dues.

Posted on: 28th Mar, 2011 12:02 am
>>If the money from the reverse runs out what will happen?

They don't receive anymore cash, and the Reverse Mortgage continues until the last person on Title no longer occupies the home as their primary residence.
Posted on: 28th Mar, 2011 07:52 pm
My husband and I sold our home in November of 2010. We did not want to relocate until November or December of this year, 2011. We leased a home and the lease runs out in November of this year.We will both be 63 years old when we purchase our next property. Are we eligible for the Reverse purchase loan through the FHA program?
Posted on: 24th Jul, 2011 08:19 am
Posted on: 24th Jul, 2011 08:29 am
How much is added to the loan amount each year?
Posted on: 28th Aug, 2011 11:01 pm
How much is added to the loan amount each year?
Posted on: 28th Aug, 2011 11:01 pm
Every month an interest charge is incurred against the outstanding balance, but it's deferred, so there's no monthly payment required.

The amount of interest depends on the size of your outstanding balance, and your interest rate. When you're researching which program works best for you, ask your Loan Officer to provide you with an Amortization Schedule. That schedule will estimate how the Reverse Mortgage works until you're 100.
Posted on: 29th Aug, 2011 07:02 am
Wife & I are both 67. What would be our contribution to a condo purchase of $125,000.00. If said condo was sold 3 years later and had appreciated 10% to &137,500 ,am I correct to assume I would get back my original contribution plus the appreciated amount minus interest and payments made by the Reverse Mort. ?
Posted on: 07th Nov, 2011 02:16 pm
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