While many people are familiar with the concept of a reverse mortgage, fewer know the ins and outs of the “HECM”, or Home Equity Conversion Mortgage. This specific type of reverse mortgage, which comprises the vast majority of reverse mortgages in the U.S., is insured by the Federal Housing Administration and follows rules and regulations set by the Department of Housing and Urban Development.
While some states have specific rules that apply to reverse mortgages beyond what the HECM program requires, the program is offered nationally and for the most part HECMs are the same state to state. For anyone considering a reverse mortgage, it’s a good idea to have a basic understanding of what the HECM program is and how it works.
In this article you will learn:
- Home Equity Conversion Mortgage program basics
- How FHA insurance works and what it guarantees
- Requirements of all HECM loans
- How a HECM compares with a HELOC
- Additional resources and where to learn more about the HECM program
HECM program basics
The Home Equity Conversion Mortgage program is regulated by the Department of Housing and Urban Development (HUD) and has been in place for several decades. The HECM program was designed to allow senior homeowners who are age 62 or older to tap into their home equity via a reverse mortgage while they still live in their homes.
In other words, the HECM loan allows qualifying homeowners to age in place and access their home equity to pay for needs and wants they may have later in life.
Who qualifies for a HECM loan?
The program is available to qualifying borrowers who own their homes outright or have a significant amount of equity, and who are age 62 or older. All HECM borrowers must undergo a financial assessment administered by the lender to determine their willingness and ability to maintain the requirements of the loan, including payment of taxes and homeowners’ insurance.
How does a HECM work?
While a forward mortgage balance falls over time, a reverse mortgage balance grows over time, as the borrower accesses the equity and accrues loan interest, all of which must be repaid when the loan comes due and payable after a maturity event; typically, being when the borrower passes away, or moves from the home permanently.
Borrowers can receive their proceeds in several ways including a lump sum payment, line of credit, or term or tenure payments.
How much does it cost?
The Home Equity Conversion Mortgage program requires an upfront mortgage insurance premium (MIP) and annual insurance premiums over the course of the loan. The MIP is based upon the loan amount. Upfront closing costs may include an origination fee as well as standard settlement fees.
What is required?
Among the requirements of the HECM program, borrowers must complete HUD-approved reverse mortgage counseling prior to applying for the loan. Once the loan has closed, borrowers must maintain homeowners’ insurance and their property taxes, as well as upkeep to FHA standards.
How FHA insurance works and what it guarantees
FHA insurance offers several protections and covers both the lender and the borrower. Borrower protections include the HECM’s non-recource feature, which means the borrower will never owe more to repay the loan than the home is worth at the time of sale. Additionally, FHA insurance guarantees the borrower will receive his or her loan proceeds as agreed upon under the terms of the loan, even in the event the lender goes out of business.
Requirements of all HECM loans
The Home Equity Conversion Mortgage program has several requirements. Among the requirements of the borrower:
- 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
Qualifying property types include 1–4-unit dwellings and condo units that are FHA-approved.
How the HECM compares with a HELOC
Many borrowers will consider how comparable options such as selling the home or taking out a Home Equity Line of Credit (HELOC) stack up against a HECM.
While the HELOC also allows borrowers to access home equity while they live in the home, there are some key benefits of a HECM that a HELOC does not offer, such as the guarantee that a HECM credit line will never be frozen by the lender.
HELOC vs Reverse Mortgage Product Comparison
|Compare Features||Traditional Home Equity Line of Credit (HELOC)||Home Equity Conversion Mortgage (HECM)||Proprietary Reverse Mortgage
|Borrower Minimum Age||18||62||55|
|Line of Credit Term||10 Years||Lifetime||10 Years|
|May Be Frozen||Yes*||No*||Yes*|
|Line of Credit Growth Rate||No||For Life||7 Years|
|$0 Monthly Payment Option||No||Yes||Yes|
|Reserves||2-6 Months PITI||Any||Any|
|Low/No Closing Costs||No||No||Yes|
|Fixed Interest Rate||No||No||No|
|Common Index||Prime Rate||Treasury||Treasury|
**All line of credit programs may be frozen if you fail to maintain taxes and insurance, or leave your home as your primary residence. If you enter bankruptcy, courts will not allow you to incur new debt while in BK proceedings and therefore your line of credit during this time could also be frozen.
Additional resources and where to learn more about the HECM program
There is a wealth of information online about Home Equity Conversion Mortgage loans and reverse mortgages in general, including some information that is outdated. One benefit of the HECM program is that there are up-to-date resources maintained by HUD and the FHA to help guide borrower education and provide answers to questions existing borrowers may have. A licensed originator may also assist with pointing you in the direction to learn more.