What is a HECM Loan?

What Are HECM Loans: The Only Guide You Need

As homeowners approach retirement, they might discover personal savings and limited income are not enough to pay for living expenses. For example, whether they’d like extra income to help pay for home repairs or cover medical bills, HECM loans could be the solution they are searching for. 

What is a Reverse Mortgage (HECM) Loan?

Simply put, a reverse mortgage loan gives older American homeowners a way to turn their home’s equity into cash. The funds they receive can be used for almost anything, including paying off their existing mortgage (required as part of the loan), eliminating credit card debt, medical and other bills, or simply improving their retirement lifestyle.  

What Type of Loan is a Reverse Mortgage?

The most common type of reverse mortgage is called a Home Equity Conversion Mortgage, or HECM and is insured, and regulated, by the Federal Housing Administration (FHA). Being regulated by the FHA means a HECM has certain features in place to protect borrowers; one of which is a counseling requirement. Since the loan is insured by the FHA, the borrower will never owe more than the value of the home when the loan comes due. 

Instead of traditional monthly mortgage payments, a reverse mortgage is normally paid back at the end of the loan term in one lump sum when the homeowners permanently leave the home. During the life the loan, the borrower is only responsible for paying property taxes and insurance, any HOA fees and for maintaining the property. 

It’s simple and easy— to qualify for a “HECM” reverse mortgage: 

• The borrower must be at least 62 years old.** 
• The borrower must live in and own their home. (Must be their principal residence). 

Then their age, appraised home value, and current interest rates are used to calculate the amount they may receive. 

HECM Loans: The Most Important Features Your Client Should Know

3 Most Common Reasons People get a Reverse Mortgage: 

1. Eliminate Monthly Mortgage Payments:* One of the best reverse mortgage benefits! A reverse mortgage pays off the borrower’s existing home mortgage. It eliminates their required monthly mortgage payments* – that can mean hundreds or thousands of dollars of extra cash in their pocket each month. 
2. Stay at Home: It’s the homeowner’s home. Not the lenders. They remain the owner of their home and can stay as long as they wish. As the homeowner, they must continue to pay home insurance, property taxes, any HOA fees and keep up basic home maintenance during the loan period. When the home is sold, the loan is repaid (including accrued interest and any fees) and any remaining equity goes to the borrower or their heirs. 
3. Access Extra Cash: The money the borrower receives from a reverse mortgage can be used for almost anything. Some homeowners use the funds to pay off common debt such as credit cards or medical bills. Others choose to make updates or well-needed repairs to their home – it could be as simple as replacing an old kitchen appliance or getting a new roof – it’s up to your client! A reverse mortgage was created to give older Americans a way to improve their retirement lifestyle – their home’s equity can do just that. 

HECM Loans vs. Traditional Mortgage Loans

HECM Loans vs. Traditional Mortgage Loans 

It’s called a “reverse” mortgage because of the way the borrower’s home’s equity is used, and importantly, how the loan is repaid. Unlike traditional mortgages that require monthly mortgage payments, reverse mortgages give the homeowner options on how and when to pay the loan back. 

Instead of traditional monthly mortgage payments, a reverse mortgage is typically paid back at the end of the loan term in one lump sum when the homeowners permanently leave the home. 

HECM loan payment options: 

• Pay the loan back in one lump sum when the last borrower leaves the home. 
• Make monthly mortgage payments (just like borrowers do on a traditional mortgage) of any amount they choose! They also have the option to adjust or stop making mortgage payments* whenever they choose. Whatever the loan balance is at the end of the loan term is paid off at that time. 
• Make payments of any amount whenever the borrower chooses! Whatever the loan balance is at the end of the loan term is paid off at that time. 

How Does a Reverse Mortgage Program Work?

Step 1 – Research

The first step is to ensure you know the reverse mortgage options available to your clients. You should take time to understand your clients’ needs and their specific situation so you can best share how a reverse mortgage can serve them. If you need help determining which reverse mortgage and what terms can best fit your clients’ situation, speak with your Account Executive. Your Account Executive can help you run quotes and provide excellent resources for you and your clients. 

Step 2 – Counseling and Application 

In order to safeguard your client’s interests, HUD requires all HECM (Home Equity Conversion Mortgage) reverse mortgage applicants to undergo reverse mortgage counseling with a HUD-approved counselor. During this time, their application will be completed. 

Step 3 – Processing and Approval 

The borrower’s reverse mortgage professional will help them schedule an acceptable appraisal to determine the value of their property — a standard practice for any mortgage application. The appraisal will then be added to their application and submitted for underwriting review. 

Step 4 – Closing

A closing agent will contact the borrower to sign the final documents and discuss how they would like to receive their funds. 

Why Your Client Should Consider a Reverse Mortgage in Retirement

• The tax-free money that the borrower receives is intended to support their retirement lifestyle. The funds can be used now, later or kept for an emergency – it’s all up to them! 
• Increase monthly cash flow
• Pay off an existing mortgage (required as part of the loan)
• Pay credit card bills
• Pay medical bills
• Fund home repairs and improvements
• Pay property taxes and home insurance
• Travel
• Gifts
• Improve their lifestyle
• Invest or diversify their retirement portfolio
• In–home care

How to Qualify for a HECM Loan

It’s simple and easy to qualify for a reverse mortgage: 

• The borrower must be at least 62 years old for a HECM (or at least 60 years old for Smartfi’s Choice Jumbo Reverse Mortgage)** 
• They must own the property and live in it as their primary residence 
• The property must have an acceptable appraisal 

The borrower’s age, appraised home value, and current interest rates are used to calculate the amount they may receive.
Some other factors to know: 

• The property must be FHA approved. 
• Qualification is based on the youngest borrower on the application.** 
• Primary residence means that the borrower must reside at the property consecutively for six months and one day per year. 
• The borrower must continue to pay property taxes, home insurance, any HOA fees, and continue to maintain the property. 
• Reverse mortgages can be used to pay off existing mortgages on their home. In fact, if they have a traditional mortgage, it is required that they pay off this mortgage (and any additional liens on the property) when obtaining a reverse mortgage. 

Common Questions

Reverse mortgages are a safe and secure financial tool, but sometimes a few misconceptions come up. Let’s go over some common questions and concerns so your clients can understand the facts. 

Does the bank own the borrower’s home? 

No, the bank never owns the borrower’s home. They remain the owner of their home and can stay as long as they wish. As the homeowner, they must continue to pay home insurance, property taxes, any HOA fees and keep up basic home maintenance during the loan period. 

When the home is sold, the loan is repaid (including accrued interest and any fees) and any remaining equity goes to them or their heirs. 

How much can be borrowed?

Three factors are considered to calculate how much equity the borrower can access: 

• The age of the youngest borrower  
• Home value  
• Current interest rates  

Although lenders use the home value the borrower initially provides them to calculate the preliminary loan amount, an independent appraiser must visit the borrower’s home to ascertain the current value of their home. The lender then re-calculates the loan amount according to this official home value. 

What if the borrower already has a mortgage? 

That is absolutely fine. 

If they qualify, a reverse mortgage will first pay off their existing mortgage and then give them the remaining proceeds. In fact, many borrowers use a reverse mortgage for that purpose—to eliminate monthly payments* on their traditional mortgage. 

Will the borrower’s children lose their inheritance?

The borrower’s children have options when it comes to the borrower’s home. Typically the loan is repaid through the sale of the home. Their heirs can choose to sell the home, pay the loan and receive any remaining equity; or, they can purchase/refinance the home, and pay back the loan with a traditional mortgage. 

Does a reverse mortgage require monthly payments?

There are never any monthly mortgage payments. However, payment of taxes, insurance, any HOA fees, and general upkeep of the home are the responsibilities of the homeowner. The loan becomes due when the last borrower permanently moves out of the home. 

What you can a reverse mortgage be used  for?

The tax-free money the borrower receives is intended to support their retirement lifestyle. The funds can be used now, later or kept for an emergency – it’s all up to them! 

• Increase monthly cash flow 
• Pay off an existing mortgage (required as part of the loan) 
• Pay credit card bills 
• Pay medical bills 
• Fund home repairs and improvements 
• Pay property taxes and home insurance 
• Travel 
• Gifts 
• Improve your lifestyle 
• Invest or diversify your retirement portfolio 
• In home care  

Reverse Mortgage Safeguards

Consumer safeguards are created to ensure the homeowner and their family understand how a reverse mortgage works. Here are just a few of the important consumer safeguards put in place for their benefit: 

Counseling

The U.S. Department of Housing and Urban Development requires all reverse mortgage applicants, whether they be obtaining a HECM (Home Equity Conversion Mortgage), Smartfi® Choice, or other reverse mortgage, to undergo third party counseling so that they feel completely comfortable with the process and understand all their options. 

No Prepayment Penalty

They can choose to repay the loan at any time without incurring any additional costs. 

Non-Recourse Loan

A non-recourse loan protects the borrower from being held liable for the loan beyond the value of the home. Their financial obligation to the lender will not be more than the home’s value when the reverse mortgage loan comes due and payable. 

Addressing Other Concerns About Reverse Mortgages

Borrower Responsibilities

Taxes and Insurance

The borrower is required to remain current on their property taxes, home insurance, and if applicable, condo fees and homeowner association fees. 

Property Maintenance 

They are responsible for completing mandatory repairs and basic home maintenance during the life of the loan. 

Occupancy Requirements 

The home must be the borrower’s principal residence, which means they need to live in their home consecutively for six months and one day of the year. 

Become a Smartfi partner and help your clients add reverse mortgage to their retirement strategy. Call (877) 816-6706 or submit this form to learn more about a partnership with Smartfi Home Loans.