While many people are familiar with the concept of a reverse mortgage, fewer know the ins and outs of HUD’s reverse mortgage program, the Home Equity Conversion Mortgage or “HECM.” This type of reverse mortgage comprises the vast majority of reverse mortgages closed in the U.S., is insured by the Federal Housing Administration, and follows the rules and regulations set by the Department of Housing and Urban Development (HUD).
While some states have specific rules that apply to reverse mortgages beyond what the HECM program requires, the program is offered nationally, and with a few exceptions, 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
What is a HECM loan?
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 aged 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 qualified borrowers who have significant equity in their homes and are 62 or older. Your home does not need to be fully paid for, but if it is, it will just mean more money is available for your use.
All HECM borrowers must undergo a financial assessment administered by the lender to determine their willingness and ability to maintain the loan requirements, 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 (UFMIP) and annual insurance premiums (MIP) throughout the loan.
The UFMIP is based on the value of the home or HUD’s maximum lending limit, whichever is less, and the annual MIP renewal is based on the outstanding loan balance. Upfront closing costs may include an origination fee and standard settlement fees.
What is required?
Among the requirements of the HECM program is that borrowers must complete HUD-approved reverse mortgage counseling before applying for a loan. Once the loan has closed, borrowers must maintain homeowners’ insurance, property taxes, other required property charges (i.e., HOA fees), and 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 non-recourse feature, which means the lender and HUD can never seek repayment from assets other than the home to repay the loan, even if the loan balance exceeds the home’s value.
Additionally, FHA insurance guarantees the borrower will receive their 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:
- 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 participate 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 set by HUD and administered by the lender, which may include a minimum credit score and income qualification.
Qualifying property types include 1–4-unit dwellings and FHA-approved condo units.
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 owner-occupying borrowers to access home equity, there are some key benefits of a HECM that a HELOC does not offer, such as the guarantee that the lender will never freeze a HECM credit line.
HELOC vs Reverse Mortgage Product Comparison
|Home Equity Conversion Mortgage (HECM)
|Proprietary Reverse Mortgage
|Traditional Home Equity Line of Credit (HELOC)
|Borrower Minimum Age
|Line of Credit Term
|May Be Frozen
|Line of Credit Growth Rate
|$0 Monthly Payment Option
|2-6 Months PITI
|Low/No Closing Costs
|Fixed Interest Rate
**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.
Is a HECM the same as a reverse mortgage?
What is the downside to a HECM loan?
How does a HECM reverse mortgage work?
Can you lose your house with a HECM?
What happens when you outlive a HECM?
How long must we occupy the home before we can apply for a HECM reverse mortgage?
Can we get an HECM if my spouse is under 62?
Can you use funds from the HECM to purchase a Second Home or an investment property?
What is a HECM reverse mortgage purchase loan?
Can you refinance a HECM loan?
Yes, you can refinance a reverse mortgage to access additional funds if your property has appreciated and there’s enough equity. Many people have refinanced over the years to benefit from lower interest rates, increased property values, and changes in HUD’s maximum lending limits. However, the ability to get more funds through refinancing isn’t guaranteed. When you wish to refinance, your loan will undergo underwriting, and you must qualify for the new loan just like any new applicant. If your income, credit, or property doesn’t meet the reverse mortgage qualifications at that time, you might not qualify for a new loan, even if you already have a reverse mortgage. HUD sets specific criteria that the new loan must meet for a borrower to refinance their existing loan with a new reverse mortgage, known as a “HECM to HECM refinance.” This process ensures the refinancing is sufficiently beneficial to the borrower to justify the costs; otherwise, HUD won’t permit the refinancing. This policy aims to protect older borrowers from being persuaded into refinancing their reverse mortgages for minimal benefit while incurring high fees. You’re allowed to refinance your reverse mortgage after 18 months, provided the refinance offers a significant benefit to you and meets current loan parameters. It’s important to note that refinancing without a compelling benefit to the borrower is not advised. There’s also a minimum waiting period between closing one loan and taking out another, designed to protect borrowers from premature refinancing, a practice known as loan flipping, which can disadvantage the borrower while benefiting the loan originator.
- The Home Equity Conversion Mortgage (HECM) is a reverse mortgage regulated by the Department of Housing and Urban Development and insured by the Federal Housing Administration (FHA).
- HECM loans allow homeowners aged 62 or older to tap into their home equity and remain in their homes while they access their equity.
- Borrowers must complete HUD-approved reverse mortgage counseling before applying for a loan and maintain homeowner’s insurance, property taxes, and upkeep to FHA standards.
- FHA insurance offers borrower protections, including a non-recourse feature that means the borrower will never owe more to repay the loan than the home is worth at the time of sale.
- HECM loans have several requirements, including age, property ownership, credit score, and income qualifications, known as financial assessment.