In the world of mortgages, one term is a must-remember for senior homeowners: Home Equity Conversion Mortgage, also known as a HECM, or “heck-um.”
A breakdown of reverse mortgage loans and how they work reveals just how helpful they can be for qualified senior homeowners who are 62 years of age or older.
Here are some common questions and answers for prospective HECM borrowers.
What is a HECM?
HECM loans are insured through the Federal Housing Administration’s reverse mortgage program.
A reverse mortgage enables homeowners to borrow some of the equity from their primary residence.
This cash flow can help senior homeowners meet their retirement needs, whether by reinforcing savings accounts, paying off lingering credit card debt or even helping to pay for a grandchild’s college tuition.
Not every senior homeowner has the cash reserves or big enough 401(k) to cover expected and unexpected retirement expenses.
For example, medical emergencies can cost hundreds of thousands of dollars.
There are no restrictions on the possible uses of reverse mortgage loan proceeds.
So while homeowners may not have enough cash or savings, what they do have is a home.
And over the course of long-term ownership, that home has built up equity that a reverse mortgage can convert to accessible funds.
What are the HECM Qualifications
Like a traditional mortgage that places a strong emphasis on down payment and income, senior homeowners must meet various requirements in order to take out a HECM loan.
But unlike traditional “forward” mortgages, a reverse mortgage looks at slightly different borrower criteria.
In order to qualify for a HECM loan, borrowers must meet the following requirements:
- The borrower must be 62 years or older
- The borrower must own the property, or have a low enough mortgage balance remaining that the existing loan can be paid off with a HECM loan
- All borrowers must take part in a Department of Housing and Urban Development-approved counseling session
- The home must be the borrower’s primary residence
- The borrower must not have any delinquent federal loans (such as student loans)
- The borrower must meet financial assessment requirements as set by the lender, which may include a credit score minimum and income qualification
Can borrowers live anywhere in the U.S.?
Yes and no. Any homeowner 62 years or older, no matter where he or she lives in the U.S., can apply for a HECM loan.
However, vacation homes and second homes aren’t eligible for reverse mortgages.
A residence must be 1-4 units to qualify.
Homeowners should also keep in mind that while living in their primary residence, they must still pay the associated fees, such as property taxes, insurance and Homeowners Association fees.
When Does A HECM Loan Need To Be Repaid?
As long as the borrower lives in the home and meets the ongoing loan obligations, the loan will remain current.
However, if a homeowner moves out of the primary residence permanently or passes away, the HECM becomes due.
At this point, the homeowner or his or her heirs may choose to sell the home and use the proceeds to pay off the loan, or can do so through other available means.
One attractive loan feature is a protection that kicks in when and if the loan is called due and the balance is greater than the home’s sale price.
FHA insurance protects borrowers by ensuring they or their heirs will never have to repay more than the home is worth at the time of sale.
HECM VS HELOC Product Comparison
Compare Features HECM (Home Equity Conversion Mortgage) HELOC (Home Equity Line of Credit)
Borrower Minimum Age 62 18
Line of Credit Term Lifetime 10 Years
May Be Frozen No Yes*
Line of Credit Growth Rate Guaranteed No
$0 Monthly Payment Option Yes No
Income Requirements Limited Full Documentation
Credit Score No Minimum 680+
Reserves No Minimum 2-6 Months PITI
Low/No Closing Costs Yes No
Fixed Interest Rate No No
Common Index Treasury Prime Rate
Is a HECM the same as a reverse mortgage?
HECM stands for “Home Equity Conversion Mortgage”. This is the most commonly used reverse mortgage loan, but it is not the only reverse mortgage option.
The HECM is the government insured reverse mortgage program through FHA.
What is the downside to a reverse mortgage?
With a reverse mortgage loan, the balance is increasing over time due to the fact that no monthly mortgage payments are required.
With an increasing balance, the equity position of the property is changing and therefore reducing the potential inheritance for your heir.
How does a HECM reverse mortgage work?
A reverse mortgage allows you to borrow money using your primary residence as collateral without the burden of making mandatory monthly mortgage payments.
The loan does not have to be paid back until the last surviving borrower vacates the property permanently or when you sell the home.
Can you lose your house with a reverse mortgage?
Yes. A reverse mortgage requires that you live in the home as your primary residence, maintain the property taxes and insurance as well as the upkeep of your home.
Failure to do any of these will result in the loan being called due and payable which could lead to foreclosure.
What happens when you outlive a reverse mortgage?
You cannot outlive a reverse mortgage loan.
A reverse mortgage borrower cannot have their loan called due and payable simply because the accrued balance exceeds the value of the home.
As long as the borrower continues to live in the home as their primary residence while maintaining the taxes, insurance and upkeep of the home the loan remains in good standing.
How to Apply for a HECM?
Senior homeowners interested in a HECM loan will need to work with a HUD Approved Lender.
Homeowners can apply online or call All Reverse Mortgage for any questions at (800) 565-1722
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