What Is a Home Equity Conversion Mortgage (HECM)?
If your client is looking for a time-efficient way to generate retirement income without selling their car, stocks, or bonds, a Home Equity Conversion Mortgage might be the right solution for them. As the cost of travel, elderly care, and home maintenance rises, more retirees and senior citizens across different states are signing up for Home Equity Conversion Mortgages.
In this article, our expert Account Executives at Smartfi will explain why the Home Equity Conversion Mortgage (HECM) is the most popular approach to home equity borrowing for people who want to enjoy a comfortable retirement. We will also detail the eligibility requirements by every FHA-approved lender and whether it’s an effective strategy for refinancing a client’s existing mortgage.
Home Equity Conversion Mortgage (HECM): What Does It Mean?
One of the most common questions financial advisors and loan officers receive from customers curious about reverse mortgages is “What does HECM stand for?” As we’ve mentioned above, whenever a lending company says something like, “HECM loans,” “HECM reverse mortgage,” or “HECM program,” they are referring to a type of home equity loan known in the financial market as the Home Equity Conversion Mortgage.
HECM reverse mortgages allow homeowners to borrow against their home equity, effectively providing them a steady stream of retirement income that they don’t have to pay back until they move out of their primary residence. Home equity loans can be more expensive than traditional mortgage loans, though they come with extensive safeguards for retirees. With a HECM, the lender will depend on the resale value of your client’s home to make money back from their reverse mortgage line of credit, which might entail decades of wait.
The Federal Housing Administration backs HECM loans, so borrowers are subject to more limits when compared to private reverse mortgages. The agreement terms of a HECM loan are often more flexible and consumer-centric than proprietary reverse mortgages. However, borrowers are limited to home values set by the FHA, currently limited at $1,149,825 for lending and calculation purposes.
Borrowers can use their loan proceeds to eliminate the mortgage payments* due on their existing home loan, see the world, enjoy life in retirement, or for many other needs. Most lenders will provide two options for loan proceeds to be disbursed;
- A line of credit that allows your client to receive monthly payments from their lender, or an open credit line to draw on as they need.
- In some instances, the borrower can receive the reverse mortgage proceeds from their home equity as a lump sum payment, and their lender won’t need to make subsequent monthly payments to them.
How Does a HECM Work?
Who Provides the Cash for HECMs?
HECM loans are the only kind of reverse mortgage that the Federal Housing Administration insures and the Department of Housing and Urban Development backs. Borrowers will need to meet FHA requirements to join a HECM program, as private lenders will fund the reverse mortgage loans and have them insured by the FHA.
Are HECMs the Same as Proprietary Reverse Mortgages?
Proprietary reverse mortgages share many similarities with HECM loans but receive no backing from the Department of Housing and Urban Development. Mortgage companies tend to reserve them for borrowers who have large estates and would like to exceed the FHA lending limits. These loans don’t carry FHA insurance; however, they tend to share the same consumer-centric safeguards, such as the non-recourse feature.
A Step-by-Step Guide to the HECM Process
If your client is looking for information about home equity conversion loans work, here are the steps to obtaining a HECM:
- The borrower researches and speaks with a licensed loan officer to determine the best reverse mortgage option for them.
- They obtain a reverse mortgage application, along with all the necessary documentation for the required housing counseling.
- They speak with a HUD-approved housing counselor for HECM reverse mortgage counseling.
- The borrower returns a signed application and a signed counseling certificate, along with supporting documentation required by the lender.
- An appraisal will be ordered by the lender through a third-party appraisal management company.
- The underwriting process is completed, including appraisal, financial assessment, and title review.
- The reverse mortgage loan closes and your client can enjoy all the benefits that the reverse mortgage provides.
Who Is a HECM Good For?
A reverse mortgage is ideal for many retirees. HECM loans can be a great way for seniors who enjoy total ownership of their homes, or have a high amount of home equity, to supplement their retirement income or add a financial resource to their portfolio. They can be used strategically throughout retirement or for more immediate needs, the decision is up to the borrower.
Seniors Who Want to Keep Their Homes
HECMs and other reverse mortgage products allow every borrower to refinance their existing mortgages and live happier and more worry-free golden years.
Until a borrower moves out of their home, they won’t have to worry about required monthly mortgage payments.*
Borrowers Who Want to Avoid Exorbitant Bank Rates
A borrower with less than stellar credit won’t have to take on crazy high-interest rates with a HECM. Plus, a HECM allows borrowers to maintain a line of credit that they can tap into when needed, while not needing to pay interest on any unused portion of that line of credit. For example, if years into the future the borrower needs professional home care but doesn’t have the cash to cover it, they can use any unused line of credit proceeds to pay for care and potentially avoid moving into a nursing facility.
HECM Loan Requirements
To qualify for a HECM and other kinds of reverse mortgage loan products, a borrower must:
- Be 62 or older**
- Hold high equity on their home if they don’t own it free and clear
- Have the ability to continue paying property taxes and other fees, and keep the house in a livable condition
Concerns for HECM Borrowers
A borrower must have a clear picture of their long-term future before taking out a HECM or any other reverse mortgage loan.
Poor Financial Literacy
The FHA requires every reverse mortgage borrower to attend a counseling session to ensure they have a good understanding of the loan and its complexities, before signing on the dotted line. The reverse mortgage is a recent product in the financial industry so borrowers should be sure to consider a few things before getting one.
High Premiums
The HECM has one of the highest mortgage insurance premiums among lending products, especially if the borrower’s loan period is short. It’s only a viable personal finance strategy if they can afford the MIP.
Non-independent Living Conditions
If the borrower ends up residing in an assisted living facility or nursing home, they will lose their status as a primary resident of their home. If the borrower leaves their house for longer than two years for cross-continental travel, the same conditions apply. The government will terminate their loan and cut their HECM payments.
If the borrower decides to relocate or change their primary residence, they must repay their HECM within one year. Failure to pay the total amount borrowed will result in the sale of their home.
Non-borrowing Spouses and Family Members
Non-borrowing residents in the borrowers home will face eviction if they fail to meet their HECM obligations. Non-borrowing spouses can continue to stay if:
- Their name is on the loan documents as a spouse
- The borrower has a legally binding marriage contract
- Their name is on the title of the borrower’s estate or added 90 days after their death
- They become a primary resident of the house the borrower leaves behind
How to Choose the Best Mortgage for You
There is an abundance of mortgage products in the market today. Before your client invests in one, they may want to download a free credit report from AnnualCreditReport.com to see where they stand.
Speak with your client and have them consult their financial advisor to help them decide if a HECM fits in their personal financial strategy.
Have more questions? Contact Smartfi Home Loans today at (877) 816-6706 or complete the Contact Us form.
**Age requirements differ by product and state.
These materials are not from and have not been approved by, HUD, FHA, or any government agency.
Smartfi Home Loans does not guarantee the accuracy of any information. These materials do not pre-qualify your client for any loan program and details should be verified independently with one of our Account Executives. All home lending products are subject to credit and property approval. Rates, program terms, and conditions are subject to change without notice. Not all products are available in all states or for all amounts. Other restrictions and limitations apply.
