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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.
Hi billrun,

If you have a reverse mortgage and sell off the property, the reverse mortgage lender will recover the amount in full. If he receives a profit from the sale, then that will be divided between you and your spouse.

Thanks
Posted on: 07th Nov, 2011 08:55 pm
My parents have recently taken out a reverse mortgage - At first I thought it was a horrible idea since we have had the home in our family now for many generations but after speaking to my lender they explained that my parents home be mine as long as I can pay off anything that the borrow. Im calculating that the home appreciation alone should cover over the interest costs so it is essentially a free loan for them - I'm glad that they now have more money for their retirement. They have got help by a web site. you can find the website by searching
reverse mortgage lenders direct

reversemortgagelendersdirect.com
Posted on: 08th Apr, 2013 09:24 am
hi harris!

welcome to the forums!

yes, reverse mortgage is a good option for the seniors. upon their death, you can refinance the loan into a normal conventional mortgage in your name and pay it off.

feel free to ask if you have further queries.

sussane
Posted on: 08th Apr, 2013 09:16 pm
"Harris" isn't real, Sussane. Reverse Mortgages Direct dot com leaves messages like that all over the internet, to get the reciprocol link for SEO purposes, and fool Seniors ... it's sad - they should be banned.
Posted on: 05th Aug, 2013 01:21 pm
Thanks for informing me about that Raymond! I will keep a check if he posts any other such queries.
Posted on: 05th Aug, 2013 10:20 pm
A Reverse Mortgage Loan for senior homeowners that uses a portion of the home's equity as collateral. The loan generally does not have to be repaid until the last surviving homeowner permanently moves out of the property or passes away. At that time, the estate has approximately 6 months to repay the balance of the reverse mortgage or sell the home to pay off the balance.
All remaining equity is inherited by the estate. The estate is not personally liable if the home sells for less than the balance of the reverse mortgage. Need to learn more about this.
Posted on: 16th Aug, 2013 05:02 am
I want to do a HECM refi on my home that has no mortgage on it and close by 12/15/2013. I know the closing costs can be wrapped into loan but I want to pay the closing cost a month after closing because the lender prefers it that way. My question is; the MIP and Origination points, is the total amount tax deductible for 2013? Thank you
Posted on: 18th Sep, 2013 02:15 pm
Hi georgia bankston!

Welcome to the forums!

This is something which you will have to clarify with a tax adviser.

Feel free to ask if you've further queries.

Sussane
Posted on: 18th Sep, 2013 10:26 pm
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