The Federal Housing Administration’s reverse mortgage program allows a consumer to withdraw some of the equity in a home while they remain in the residence. Known as the The Home Equity Conversion Mortgage (HECM), there are certain requirements that must be met to qualify for the program. With a HECM, you choose how you want to withdraw your funds, whether in a fixed monthly amount, a line of credit or a combination of both. Private reverse mortgage programs exist, but are not backed by the United States Department of Housing and Urban Development.
To qualify for the FHA’s HECM program, a homeowner must be a minimum of 62 years old. In addition, you must own your home outright or have only a small mortgage on the property. The residence must be your primary home, and you must not owe any money to the federal government. Participation in a HECM counseling program is also required.
How the HECM Program Works
The HECM program allows a qualified homeowner to borrow against the equity in his home. Five payment plans are available: Tenure, Term, Line of Credit, Modified Tenure and Modified Term. One plan must be chosen and a fee of $20.00 is charged to change.
Different from ordinary home equity loans, a FHA reverse mortgage does not require repayment of the loan amount. Lenders in the program receive their principal and interest when the home is sold. The owner is allowed to stay in the home and any remaining value after the lender has been paid goes to you or your heirs.
To protect against a shortage in the value of the home versus the sales price, the FHA charges an insurance premium to all borrowers. If a shortfall does exist when the home is sold, the FHA pays the lender the difference.
The amount that a qualified homeowner can borrow depends on age, the current interest rate, loan fees and the appraised value of the home (or the FHA’s HECM mortgage limit for your area, whichever is less). In general, the more valuable your home is, the older you are and the lower the interest rate, the more you can borrow. The maximum amount that can be borrowed in the HECM program is capped at $625,500.
Costs of the HECM Program
Most of the costs associated with the HECM program can be paid by financing them and having them paid from the proceeds of the loan. This allows the borrower to eliminate the need for out of pocket expenses.
The HECM loan includes several fees including an origination fee, closing costs. mortgage insurance premium, interest and servicing fees.