Reverse mortgages are the most misunderstood loan program in the market today. The FHA insured reverse mortgage, called the Home Equity Conversion Mortgage (HECM), is by far the most popular reverse mortgage.
Today, I want to shed some light on the HECM by answering a few of the most frequently asked questions about reverse mortgages.
What exactly is a HECM reverse mortgage?
HECM stands for home equity conversion mortgage and is the FHA (Federal Housing Authority), insured reverse mortgage program. It is specifically designed for homeowners age 62 and above, that allows you to convert a portion of the value of your home into tax-free money*, without having to sell the home, give up title or obligate yourself to a monthly mortgage payment.
A reverse mortgage is not free money. What makes it different from a conventional mortgage is that as long as either you or your spouse live in the home, and continue to pay the property taxes and homeowners insurance, you never have to make a payment. If you want to make payments, you can, but you are not required to do so.
Please remember that you are still charged interest every month, you just do not pay it on a monthly basis. The home stays in your name so you have to continue to maintain the home as well as pay the taxes and insurance.
How much money is available from the reverse mortgage?
There are no fixed loan-to-value ratios with the HECM reverse mortgage program. The amount available is based on:
- The age of the youngest homeowner
- The value of the home (Up to FHA lending limits)
- The current interest rate
Typically, the amount available is anywhere from 45% - 70% of the value of the home.
What are the changes to the HECM reverse mortgage program over the last few years?
There have been a number of changes to the HECM reverse mortgage program, but the most important ones are:
- Protections for non-borrowing spouses: Allows spouses that are younger than the minimum age of 62 years old to stay in the home when the borrower passes away or permanently leaves the home.
- Limits on the amount of money available during the first 12 months: FHA limits the maximum amount of money that you can take out during the first 12 months to 60% the loan amount. If you have an existing mortgage that is more than 60% of the amount available, you are allowed to take the amount to pay that off, plus an additional 10%. The remaining money can be set aside in a line of credit and will be available 12 months after the closing.
- Financial Assessment: FHA requires lenders to verify that you have enough income to pay the property taxes and homeowners insurance as well as good credit. They want to make sure that you will continue to pay the bills related to your home and you are more likely to do so when you have enough income and good credit.
What happens when the loan comes due?
The HECM reverse mortgage only comes due when the last homeowner permanently leaves the home. This can be from selling the home, moving to assisted living or passing away. At that time, the amount borrowed, plus all accrued interest and fees will come due.
When the last homeowner passes away, the heirs inherit the home. The bank does not automatically take the home. The heirs have six months to either sell the home or refinance it and pay off the reverse mortgage.Any remaining equity will be inherited by the heirs. If it takes longer than six months to sell the home, FHA allows up to two 90 day extensions so the heirs have up to 12 months to sell or refinance.
If there is no equity in the home when the last homeowner passes away or leaves permanently, the heirs can sign the home over to the lender and simply walk away. The bank cannot come after any additional monies nor the heirs or the estate for any loss. This is what is called a 100% non-recourse loan.
People typically have a lot of questions about reverse mortgages and these are just a few of the most common ones. It is best to consult a reverse mortgage specialist to make sure you get all of your questions answered so you can make an informed decision.
*You should consult your tax advisor