If you’re looking for a time-efficient way to generate retirement income without selling your car, stocks, or bonds, a Home Equity Conversion Mortgage might be the right solution for you. As the cost of travel, elderly care, and home maintenance rise, more retirees and senior citizens across different states are signing up for Home Equity Conversion Mortgages.
In this article, our mortgage experts 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 your existing mortgage.
Home Equity Conversion Mortgage (HECM): What Does It Mean?
One of the most common questions our licensed 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. If you get a HECM, your lender will depend on the resale value of your home to make money back from your 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 $970,800 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 you to receive monthly payments from your lender, or an open credit line to draw on as you need.
- In some instances, you can receive the reverse mortgage proceeds from your home equity as a lump sum payment, and your lender won’t need to make subsequent monthly payments to you.
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 you’re looking for an online consumer information session about home equity conversion loans, here’s how they work:
- Research and speak with a licensed loan officer to determine the best reverse mortgage option for you.
- Obtain a reverse mortgage application, along with all the necessary documentation for the required housing counseling.
- Speak with a HUD-approved housing counselor for the HECM or Proprietary reverse mortgage counseling.
- Return a signed application and 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.
- Complete the underwriting process, including appraisal, financial assessment, and title review.
- Close your reverse mortgage loan and enjoy all the benefits that the reverse mortgage provides you.
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 you.
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 has to:
- 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.
The HECM has one of the highest mortgage insurance premiums among lending products, especially if your loan period is short. It’s only a viable personal finance strategy if you can afford the MIP.
Non-independent Living Conditions
If you end up residing in an assisted living facility or nursing home, you will lose your status as a primary resident of your home. If you leave your house for longer than two years for cross-continental travel, the same conditions apply. The government will terminate your loan and cut your HECM payments.
If you decide to relocate or change your primary residence, you must repay your HECM within one year. Failure to pay the total amount borrowed will result in the sale of your home.
Non-borrowing Spouses and Family Members
Non-borrowing residents in your home will face eviction if you fail to meet your HECM obligations. Non-borrowing spouses can continue to stay if:
- Their name is on the loan documents as a spouse
- You have a legally binding marriage contract
- Their name is on the title of your estate or added 90 days after your death
- They become a primary resident of the house you leave behind
How to Choose the Best Mortgage for You
You can find an abundance of mortgage products in the market today. Before investing in one, you may want to download a free credit report from AnnualCreditReport.com to see where you stand.
Talk with your Financial Advisor and a Reverse Mortgage Specialist to decide if a HECM fits in your personal financial strategy. Contact Smartfi Home Loans today at (877) 816-6706 or complete the Contact Us form for a free consultation.