Reverse Mortgage Information Guide
FHA Reverse Mortgages 3 Common Misconceptions about Reverse Mortgages 4
How the Program Works 4
Benefits of a HECM loan 4
HECM vs. Traditional Mortgage 4
Financial Requirements 5
Mortgage Amount Based On 7
HECM Costs 7
Frequently Asked Questions 8
Table of Contents
FHA Reverse Mortgages
If you are a homeowner age 62 or older and have equity on your home, and are currently living in the home, you may participate in FHA’s Home Equity Conversion Mortgage (HECM) program. The HECM is FHA’s reverse mortgage program that enables you to withdraw the equity in your home. You choose how you want to withdraw your funds, whether in a fixed monthly amount or a line of credit or a combination of both.
You can also use a HECM to purchase a primary residence if you are able to use cash on hand to pay the difference between the HECM proceeds and the sales price plus closing costs for the property you are purchasing.
Common Misconceptions about Reverse Mortgages
With a reverse mortgage,
borrowers give up the title to their home.
FALSE: You retain 100% ownership of the property. You decide if you want to sell the home, paint or remodel the home. It’s YOUR home.
When I no longer occupy the home, the lender takes the house.
FALSE: When the borrower(s) can no longer occupy the property, the property goes to the heirs or beneficiaries who may sell or refinance the property to repay the HECM lender. Any proceeds from the sale are the heirs or beneficiaries to keep.
There are rules stipulating how reverse mortgage funds can be used.
FALSE: Proceeds from a reverse mortgage can be used freely by the borrower for any purpose,
including vacation, home repairs and improvements, pay bills, etc.
How the Program Works
There are many factors to consider before deciding whether a HECM is right for you. To aid in this process, you must meet with a
HECM counselor to discuss program
eligibility requirements, financial implications and alternatives to obtaining a HECM and repaying the loan. Counselors will also discuss provisions for the mortgage becoming due and payable.
Upon the completion of HECM counseling, you should be able to make an independent, informed decision of whether this product will meet your specific needs. Your
Primary Residential Mortgage, Inc.
Loan Officer will provide you with information to contact an approved HECM counselor.
There are borrower and property eligibility requirements that must be met. You can use the listing below to find out if you qualify. If you meet the eligibility criteria, your Primary Residential Mortgage Loan Officer can help you complete an application.
Benefits of a HECM loan
A HECM loan is an affective way to convert home equity into income.
Some of other benefits a getting a HECM loans include:
• Continue to live and own the home without having to make a mortgage payment
• Obtain money for things such as home repairs or improvements, property taxes, and more
• Supplement retirement income
• Cover medical expenses
HECM vs. Traditional Mortgage
With a traditional mortgage or home equity loan, you need to have sufficient income and credit to qualify for the loan, and you are required to make monthly mortgage payments.
A HECM loan pays you and you qualify regardless of your income or credit score. With a HECM loan there is no monthly mortgage payment. The HECM loan only financial requirement is that you keep active homeowner’s insurance policy and pay your annual property taxes.
Repayment of the HECM loan is only required when you no longer occupy the property as your primary resident or fail to pay your property taxes or homeowner’s insurance.
Borrower Requirements
You must:
• Be 62 years of age or older
• Own the property outright or have equity in the home
• Occupy the property as your principal residence
• Not be delinquent on any federal
• debtParticipate in a consumer information session given by a HUD- approved HECM counselor
Financial Requirements
Income, assets, monthly living expenses, and credit history may be verified.
Timely payment of real estate taxes, hazard and flood insurance premiums may be verified.
You can select from five payment plans:
Tenure
Equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.
Term
Equal monthly payments for a fixed period of months selected.
Line of Credit
Unscheduled payments or in installments, at times and in an
amount of your choosing until the line of credit is exhausted.
Modified Tenure
Combination of line of credit and scheduled monthly payments for as long as you remain in the home.
Modified Term
Combination of line of credit plus monthly payments for a fixed period of months selected by the borrower.
Mortgage Amount Based On
The amount you may borrower will depend on:
• Age of the youngest borrower
• Current interest rate
• Lesser of appraised value or the HECM FHA mortgage limit or the sales price; and
• Initial Mortgage Insurance Premium--your choices are HECM Standard or HECM SAVER
You can borrow more with the HECM Standard option. Although you may borrower less money with HECM Saver, your upfront fees are lower than the upfront fees a HECM Standard. In addition, the more valuable your home is, the older you are, and the lower the interest rate, the more you can borrow. If there is more than one borrower, the age of the youngest borrower is used to determine the amount you can borrow.
HECM Costs
You can pay for most of the costs of a HECM by financing them and having them paid from the proceeds of the loan. Financing the costs means that you do not have to pay for them out of your pocket.
On the other hand, financing the costs reduces the net loan amount available to you.
The HECM loan includes several fees and charges, which includes:
1. mortgage insurance premiums (initial and annual)
2. third party charges, and
3. origination fee. Your loan officer can provide with further details about the applicable fees.
1. Mortgage Insurance Premium You will incur a cost for FHA
mortgage insurance. The mortgage insurance guarantees that you will receive expected loan advances. You can finance the mortgage insurance premium (MIP) as part of your loan.
You will be charged an initial mortgage MIP at closing, which is either 2% (HECM Standard) or .01% (HECM Saver) of the lesser of the appraised value of your home, the FHA HECM mortgage limit or the sales price. Over the life of the loan, you will also be charged an annual MIP that equals 1.25% of the
mortgage balance.
2. Third Party Charges
Closing costs from third parties can include an appraisal, title search and insurance, surveys, inspections, recording fees, mortgage taxes, credit checks and other fees.
3. Origination Fee
You will pay an origination fee to compensate the lender for processing your HECM loan. A lender can charge a HECM origination fee up to $2,500 if your home is valued at less than $125,000. If your home is valued at more than $125,000 lenders can charge 2% of the first
$200,000 of your home’s value plus 1% of the amount over $200,000.
HECM origination fees are capped at
$6,000.
Frequently Asked Questions
The Home Equity Conversion Mortgage (HECM) is FHA’s reverse mortgage program, which enables you to withdraw the equity in your home. The HECM is a safe plan that can give older Americans greater financial security. Many seniors use it to supplement Social Security, meet unexpected medical expenses, make home improvements, and more. It is smart to know more about reverse mortgages, and decide if one is right for you!
1. What is a reverse mortgage?
A reverse mortgage is a special type of home loan that lets you convert the equity in your home into cash.
The equity that you built up over years of making mortgage payments can be paid to you. However, unlike a traditional home equity loan or second mortgage, HECM borrowers do not have to repay the HECM loan until the borrowers no longer use the home as their principal residence or fail to meet the obligations of the mortgage.
You can also use a HECM to
purchase a primary residence if you are able to use cash on hand to pay the difference between the HECM proceeds and the sales price plus closing costs for the property you are purchasing.
2. Can I qualify for FHA’s HECM reverse mortgage?
To be eligible for a FHA HECM, the FHA requires that you be a homeowner 62 years of age or older, own your home outright, or equity on your home, and you must live in the home. You are also required to receive consumer information from a HECM counselor prior to obtaining the loan.
3. Can I apply for a HECM even if I did not buy my present house with FHA mortgage insurance?
Yes. You may apply for a HECM regardless of whether or not you purchased your home with an FHA- insured mortgage.
4. What are the differences between a reverse mortgage and a home equity loan?
With a second mortgage, or a home equity line of credit, borrowers must have adequate income to qualify for the loan, and they make monthly payments on the principal and interest. A reverse mortgage is different, because it pays you – there are no monthly principal and interest payments.
5. Will we have an estate that we can leave to heirs?
When the home is sold or no longer used as a primary residence, the cash, interest, and other HECM finance charges must be repaid. All proceeds beyond the amount owed belong to your spouse or estate. This
means any remaining equity can be transferred to heirs. No debt is passed along to the estate or heirs.
6. How much money can I get from my home?
The amount you may borrower will depend on:
Age of the youngest borrower
• Current interest rate
• Lesser of appraised value or the HECM FHA mortgage limit or the sales price; and
• Initial Mortgage Insurance Premium—your choices are HECM Standard or HECM SAVER
• You can borrow more with the HECM Standard option. In addition, the more valuable your home is, and the older you are, the more you can borrow. If there is more than one borrower, the age of the youngest borrower is used to determine the amount you can borrow. For an estimate of HECM cash benefits, contact your Primary Residential
Mortgage Loan Officer.
7. How do I receive my payments?
You can select from five payment plans:
Tenure
Equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.
Term
Equal monthly payments for a fixed period of months selected.
Line of Credit
Unscheduled payments or in installments, at times and in an amount of your choosing until the line of credit is exhausted.
Modified Tenure
Combination of line of credit and scheduled monthly payments for as long as you remain in the home.
Modified Term
Combination of line of credit plus monthly payments for a fixed period of months selected by the borrower.
8. What if I change my mind and no longer want the loan after I go to closing? How do I do this?
By law, you have three calendar days to change your mind and cancel the loan. This is called a three day right of rescission. The process of canceling the loan should be explained at loan closing. Be sure to ask the lender for instructions on this process. Mortgage lenders differ in the process of canceling a loan.
You should ask for the names of the appropriate people, phone numbers, fax numbers, addresses, or written instructions on whatever process the company has in place. In most cases, the right of rescission will not be applicable to HECM for purchase transactions.
