The Home Equity Conversion Mortgage

The Home Equity Conversion Mortgage (HECM) is a very popular reverse mortgage program, it is insured by the Federal Housing Administration (FHA). In order for a borrower to qualify for a HECM, he or she must fulfill several basic requirements such as

  • Must be 62 years or older
  • Be the owner of the property
  • Property must be primary residence
  • Applicant must receive counseling from an approved councilor

The Department of Housing and Urban Development (HUD) has worked with the American Association of Retired Persons (AARP) to come up with a list of approved counselors. Counseling could be the most important part of the HECM. The counselor will work with you to see which type of reverse mortgage is right for you, and how to best attain your goals.

The amount that can be borrowed and the size of the payments depends on 3 basic factors:

Age of the Borrower
Just like with other reverse mortgages the age of the borrower is a concern for lenders. If there are more than one borrowers then the age of the youngest borrower is used to determine the amount that can be borrowed.

Current Interest Rate
A reverse mortgage is a loan, and just like a standard loan, the principal must be repaid with interest. In this case however the lender can only look to the home for repayment. The interest rate will be a deciding factor in how much can initially be borrowed.

The Value of the Home or FHA limits
The value of the home in this case makes the assumption that there are no liens on the home. In the event that there are liens on the home, they must be paid off before the loan is made, or must be paid from the reverse mortgage payments. This would reduce the amount of the money a borrower can get every month. Just like other mortgages the FHA insures the home equity conversion mortgage has a maximum amount that can be borrowed. The maximum depends on the area and the state. The total amount that can be borrowed will be the lesser of home value or FHA loan limits.

The closing costs of the HECM can also be financed as part of the mortgage. The financial requirements do NOT require the following:

  • income or credit qualifications
  • repayment as long as the home is the principle residence

In addition to the borrower meeting certain requirements the property must also meet some requirements. The property:

  • Must be a 1-4 unit building with one of the units being the primary residence of the borrower, or must be a single family home.
  • Can be a FHA approved Planned Unit Development (PUD)
  • Can be a FHA approved condominium
  • Can be a cooperative that conform to FHA guidelines
  • Can be a manufactured home
  • Must meet a minimum level of quality(some repairs and improvements may be funded with the mortgage)

Getting a home equity conversion mortgage can be used to supplement retirement income. However, because it is insured by the FHA, it is subject to loan limits. Also, keep in mind that the loan is not required to be repaid as long as the house is the primary residence. This means that if you move or sell the house, you will have to repay the loan. Be sure to speak with an approved counselor before coming to a decision.

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