An FHA insured reverse mortgage is called a Home Equity Conversion Mortgage, (HECM). They have numerous safeguards built in to the process as well as a few that have been added over the years.
No Required Mortgage Payments – There are no monthly payments required with a HECM reverse mortgage. Having said that, please note that the home is still in your name and you, the homeowner, must still pay your own property taxes and homeowners insurance. You must also maintain the home. However, this is not new. These are things you do anyway.
While there is no monthly payment required, we in the industry like to say it is a payment optional loan. You can make payments if you choose.
FHA Insured – All HECM’s are insured by the Federal Housing Administration. What this means for you is that you are protected in case of a servicer going out of business. For example, if you have $100,000 available to you in your line of credit, or are receiving a monthly payment from your reverse mortgage, and the servicer goes out of business or, more likely, the service center is hit by a natural disaster, and cannot honor their commitment, FHA will step in and make sure that you have the money available.
Independent Counseling – Anyone who wants to get a HECM reverse mortgage must complete a one-on-one counseling session with an independent counselor. This has been required since reverse mortgages became an FHA product in 1989.
It is not the counselors’ job to talk you into or out of a reverse mortgage. They simply want to make sure that you understand how the program works as well as talk about other options, such as selling the home.
Annual and Lifetime Interest Rate Caps – While there is a fixed rate option, most HECM reverse mortgages are set up on an annually adjustable interest rate. The annually adjusted rate is tied to the one-year London Interbank Offered Rate (1-year LIBOR). The annual cap for rate changes is 2.00% and the lifetime rate change cap is 5.00%.
For example, if you get a rate at 4.00% to start, and the LIBOR index increase by 0.50% next year, your rate will increase to 4.50%. If the next year the rate dropped by 1.00%, your rate would decrease to 3.5%. However, please note that any rate changes up or down do not impact you directly because you have no payment to make. It does affect you indirectly in the amount of interest you are charged each month.
60% Limit on Initial Advance – All FHA HECM loans have limits on the amount of money the homeowner can withdraw during the first 12 months of the loan. This limit is 60% of the Principal Limit (PL). The PL is the amount of money that is available from the reverse mortgage.
For example, if you have $100,000 available to draw from the reverse mortgage, and you own your home free and clear (no mortgage or liens), the most you can take out during the first 12 months is $60,000. The other $40,000 will be available after the first year.
However, if you have a mortgage that exceed this amount, say $75,000, you can take an additional 10% of the PL above this amount. This means that you can take $75,000 to pay off the current mortgage, plus $10,000 (10% of the $100,000 PL). This is also known as the Initial Disbursement Limit.
Non-Borrowing Spouse Protection – In order to qualify for a HECM, the homeowner must be at least 62 years old, live in the home and be able to afford to pay the property charges. What happens though if only one spouse is 62 and the other is younger?
The younger spouse is known as a non-borrowing spouse (NBS), because he/she is not old enough to be a borrower. However, the loan comes due when the last borrower passes away. The NBS is not a borrower so he/she used to have to pay the loan off, usually by selling the home.
The NBS rule protect the younger spouse and allows him/her to continue to live in the home after the borrower passes away. The NBS must continue to meet the obligations of the loan (keeping his/her name on title, paying property charges, and occupying the home as a primary residence). So even if you have a spouse under age 62 you can do a reverse mortgage and your spouse will still be able to stay in the home if you pass away.
Non-Recourse Loan – All HECM loans are 100% “Non-Recourse”. What this means is that should the balance on the loan exceed the value of the home, the lender can never kick the homeowners out, nor try to collect from the borrower, the estate or the heirs.
The actual verbiage from the agreement reads as follows:
“Your liability under the plan is limited to the net sale proceeds from the sale of the property. You will have no personal liability for payment of the notes. No deficiency judgement may be taken against you or your estate.”
The HECM reverse mortgage loan is the most regulated loan I have ever done in over 30 years of personal finance and mortgages. Please feel free to call me with any questions at 303-513-2748.