What is the downside of a HECM loan?

The main downside is that the loan balance increases over time as no monthly payments are required, which can reduce the equity and potential inheritance for heirs. Borrowers can make payments at any time to manage the balance.

How long must we occupy the home before applying for a HECM?

There is no minimum occupancy time. You are eligible if the home is your primary residence.

Can HECM funds be used to purchase a second home or investment property?

Yes, you can use the funds for any purpose, including purchasing other properties. However, lenders should not sell financial products that put your funds at risk.

Can I use a HECM to make a down payment on a house for a family member?

Yes, you can use HECM proceeds for any purpose, including helping your family with a down payment.

HECM: A Simple Guide to Home Equity Conversion Mortgages

Q: How does a HECM reverse mortgage work?

A HECM allows you to borrow against your home's equity without making monthly payments. The loan is repaid when the last borrower moves out or sells the home.

Q: What is a HECM reverse mortgage purchase loan?

A HECM purchase loan helps you buy a new home with a reverse mortgage. For specific details based on your situation, visit the purchase section of our website or call 800-565-1722.

Q: Can you lose your house with a HECM?

Yes, if you do not maintain the home as your primary residence, keep up with property taxes and insurance, or maintain the property, the loan can become due and payable, potentially leading to foreclosure.

Q: What happens when you outlive a HECM?

You can't outlive a HECM. As long as you live in your home and maintain taxes and insurance, the loan remains in good standing, even if the loan balance exceeds the home’s value.

Q: Can we get an HECM if my spouse is under 62?

Yes, except in Texas. Your spouse would be a non-borrowing spouse, allowed to live in the home for life but without access to remaining funds if you pass first.

Q: Can you refinance a HECM loan?

Yes, you can refinance to access more funds if your property's value has increased and you meet the qualifications. Refinancing is subject to underwriting and must provide significant benefits to the borrower.

August 30, 2024

Michael G. Branson Edited by

Cliff Auerswald 12 comments

Understanding the HECM Program: A Comprehensive Guide

The Home Equity Conversion Mortgage (HECM) program is the most widely used reverse mortgage option in the U.S. Insured by the Federal Housing Administration (FHA) and regulated by the Department of Housing and Urban Development (HUD), HECMs allow homeowners aged 62 or older to access their home equity while staying in their homes.

In this guide, you’ll learn:

How HECM loans work, including costs and requirements.
Key benefits of FHA insurance and borrower protections.
How HECMs compare to other home equity options like HELOCs.

Table of Contents

• Understanding the HECM Program: A Comprehensive Guide

• Eligibility: Who Qualifies for a HECM loan?

• Checklist: Key Requirements for a HECM Loan

• How Does a HECM Loan Work?

• Costs Associated with HECM Loans

• Key Requirements for Securing a HECM Loan

• The Role of FHA Insurance in HECM Loans: Protections and Guarantees

• Comparing HECM and HELOC

• Reverse Mortgage vs HELOC: Side-by-Side Comparison

• FAQs

• Summary

Eligibility: Who Qualifies for a HECM loan?

To qualify for a Home Equity Conversion Mortgage (HECM) loan, borrowers must meet several key requirements:

Age Requirement: Homeowners must be 62 years or older.
Home Equity: Significant equity in your home is necessary, but your home doesn’t need to be fully paid off. If it is, you’ll have access to more funds.
Financial Assessment: The lender must complete a financial assessment of all applicants to ensure they can meet ongoing loan obligations, such as property taxes, homeowners’ insurance, and home maintenance.

These eligibility criteria are designed to ensure borrowers can responsibly manage the loan while benefiting from the financial flexibility a HECM offers.

Checklist: Key Requirements for a HECM Loan

To qualify for a Home Equity Conversion Mortgage (HECM), you must:

Be 62 years or older.
Own your home outright or have a mortgage balance low enough to pay off with a HECM.
Complete a HUD-approved counseling session before applying.
Use the property as your primary residence.
Have no delinquent federal debts (e.g., unpaid student loans).
Pass a financial assessment to verify your ability to maintain taxes, insurance, and property upkeep.

Eligible Property Types:

1–4-unit residential homes with one unit as your primary residence.
FHA-approved condominiums.

How Does a HECM Loan Work?

Unlike a traditional mortgage, where the loan balance decreases as you make payments, a Home Equity Conversion Mortgage (HECM) works in reverse. The loan balance grows over time as you access your home’s equity and accrue interest.

A HECM loan becomes due and payable after a maturity event, such as:

The borrower permanently moves out of the home.
The borrower passes away.

Borrowers have flexibility in how they receive their funds, choosing from:

Lump Sum Payment: Access all available funds at once.
Line of Credit: Draw money as needed, with unused funds potentially growing over time.
Term Payments: Fixed monthly payments for a set period.
Tenure Payments: Fixed monthly payments for as long as you live in the home.

By offering multiple payout options, a HECM loan allows homeowners to customize their financial plan to meet their specific needs.

Costs Associated with HECM Loans

When considering a Home Equity Conversion Mortgage (HECM), it’s essential to understand the associated costs. These include both upfront and ongoing expenses, ensuring the loan remains secure and federally insured.

Key Costs of a HECM Loan:

Upfront Mortgage Insurance Premium (UFMIP):
- Based on the lesser of your home’s value or HUD’s maximum lending limit.
- This fee secures FHA insurance, offering protections like non-recourse benefits.
Annual Mortgage Insurance Premium (MIP):
- Charged yearly, calculated on the outstanding loan balance.
- Ensures the loan’s continued compliance with FHA requirements.
Closing Costs:
- Includes an origination fee set by the lender.
- Covers standard settlement fees, such as appraisals, title insurance, and recording costs.

Understanding these costs helps borrowers plan effectively, ensuring they can take full advantage of the benefits a HECM loan offers.

Key Requirements for Securing a HECM Loan

To qualify for a Home Equity Conversion Mortgage (HECM), borrowers must meet specific program requirements to ensure financial stability and compliance with FHA regulations.

Primary Requirements:

HUD-Approved Counseling:
- Before applying for a HECM loan, borrowers must complete reverse mortgage counseling with a HUD-approved agency.
- Counseling ensures you fully understand the loan terms, obligations, and benefits.
Ongoing Responsibilities:
Once the loan is in place, borrowers must:
- Maintain homeowners’ insurance and keep property taxes current.
- Cover other required property charges, such as HOA fees.
- Ensure the home is properly maintained to meet FHA standards.

These requirements are designed to protect borrowers and ensure the long-term sustainability of the loan while allowing them to enjoy the benefits of accessing their home equity.

The Role of FHA Insurance in HECM Loans: Protections and Guarantees

FHA insurance is a cornerstone of the Home Equity Conversion Mortgage (HECM) program, making it distinct from other reverse mortgage options. Beyond offering borrower protections, it ensures the overall security and reliability of the program.

How FHA Insurance Works:

Borrower Protection:
- Ensures the non-recourse feature, limiting repayment to the home’s value at sale.
- Guarantees agreed loan payments, even if the lender faces financial issues.
Lender Protection:
- Covers lenders if the loan balance exceeds the home’s value when sold.
- Provides financial stability for lenders, encouraging widespread participation in the HECM program.

Why It Matters:

FHA insurance gives both borrowers and lenders confidence in the program. Borrowers can access their home equity without fear of unexpected financial burdens, while lenders can extend loans knowing their risk is minimized. This mutual benefit has made the HECM program the most popular reverse mortgage option in the U.S.

Comparing HECM and HELOC

When deciding how to access home equity, borrowers often compare a Home Equity Line of Credit (HELOC) with a Home Equity Conversion Mortgage (HECM). While both provide access to home equity, they serve different purposes and offer distinct advantages.

Key Differences Between HECM and HELOC:

Age and Eligibility:
- HECM: Available to homeowners aged 62 or older.
- HELOC: Available to homeowners of any age who meet credit and income requirements.
Repayment Terms:
- HECM: No monthly repayment is required while you live in the home; the loan is repaid after a maturity event.
- HELOC: Requires monthly payments on interest and principal, with potential payment increases after an initial draw period.
Line of Credit Protections:
- HECM: The credit line cannot be frozen or reduced, ensuring access to funds even during economic downturns.
- HELOC: Lenders can freeze or reduce the line of credit based on market conditions or changes in borrower qualifications.

A HECM loan is often better suited for older homeowners seeking financial security without monthly payment obligations, while a HELOC may be more appropriate for short-term borrowing needs. Understanding these differences can help borrowers make an informed decision based on their financial goals.

Reverse Mortgage vs HELOC: Side-by-Side Comparison

Compare Features	Home Equity Conversion Mortgage (HECM)	Proprietary Reverse Mortgage (Non-FHA)	Traditional Home Equity Line of Credit (HELOC)
Borrower Minimum Age	62	55	18
Line of Credit Term	Lifetime	10 Years	10 Years
May Be Frozen	No*	Yes*	Yes*
Line of Credit Growth Rate	For Life	7 Years	No
$0 Monthly Payment Option	Yes	Yes	No
Income Requirements	Limited	Limited	Yes
Credit Score	Any	Any	680+
Reserves	Any	Any	2-6 Months PITI
Low/No Closing Costs	No	Yes	No
Fixed Interest Rate	No	No	No
Common Index	Treasury	Treasury	Prime Rate

*HELOC loans generally permit lenders to freeze or reduce a credit line if the home's value declines significantly. You must be prepared to make this “balloon payment” by refinancing, obtaining a loan from another lender, or using other means. You could lose your home if you cannot make the balloon payment.
Source: https://files.consumerfinance.gov/f/201204_CFPB_HELOC-brochure.pdf

**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.

Also See: HECM vs. HELOC Comparison: Features & Decision Guide

FAQs

Is a HECM the same as a reverse mortgage?

A HECM, or “Home Equity Conversion Mortgage,” is the most commonly used type of reverse mortgage, but it’s not the only option. The HECM is a government-insured reverse mortgage program offered through the FHA. Non-FHA reverse mortgages are also available from private lenders, so it’s always a good idea to explore all available programs and choose the one that best meets your needs.

What is the downside to a HECM loan?

The primary downside of a reverse mortgage is that the balance increases over time because no monthly mortgage payments are required. With an increasing balance, the equity position of the property is changing, reducing the potential inheritance for your heir. It is important to note that borrowers have the right to make payments at any time without penalty, though, and can eliminate the growing balance if they choose.

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 can be paid back once the last surviving borrower vacates the property permanently or when you sell the home.

Can you lose your house with a HECM?

Yes. A reverse mortgage requires that you live in the home as your primary residence, maintain the property taxes and insurance, and upkeep 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 HECM?

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 home’s value. The loan remains in good standing as long as the borrower continues to live in the home as their primary residence while maintaining the home’s taxes and insurance. You can come to a point where no more funds are available in your line of credit, but you can still live in the home beyond that point with no monthly mortgage payments due on the loan.

How long must we occupy the home before we can apply for a HECM reverse mortgage?

There is no minimum time required. You are eligible if you occupy the home as your primary residence.

Can we get an HECM if my spouse is under 62?

Yes, you can in all states except Texas, where the law prohibits it. Your wife would be an approved non-borrowing spouse. If you pass before the funds are all used, she would not have access to any funds still on the line, but she would still be allowed to remain in the home for life without repaying the loan.

Can you use funds from the HECM to purchase a Second Home or an investment property?

You can use the funds for any purpose you wish. HUD only frowns on a lender that provides you with a loan and sells you a financial product or service that may tie those funds up or put them at risk. One product lenders should refrain from offering their reverse mortgage clients is annuities. But you can use the funds to purchase other property if you wish.

What is a HECM reverse mortgage purchase loan?

We have volumes of information about purchase reverse mortgages on our website. We would also be more than happy to discuss specifics with you regarding your circumstances and give you exact numbers based on your age(s), desired property, area of the country, etc. (different parts of the country have different purchasing costs). You can also contact us by visiting our website and requesting information or calling us at 800-565-1722.

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 sufficiently benefits 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 can refinance your reverse mortgage after 18 months, provided the refinance significantly benefits 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.

Can I use HECM to make a down payment on a house for my daughter?

You can use HECM loan proceeds for any reason you wish. We have seen parents use the money for their children and even grandparents who wanted to see some of their inheritance go to grandchildren while they were still there to see them enjoy it. It is your house and your money. If you would like to help your daughter by giving her the cash for the down payment on her own home, you certainly may.

Summary

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.

Also See:

HECM VS. REVERSE MORTGAGE: IS THERE A DIFFERENCE?

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12 Comments on this Article

Colin J.
August 26th, 2024

My parents have an HECM reverse mortgage. At this point, it seems better to withdraw the remaining credit from the account and vacate the house, rather than sell it and pay off the loan balance. Are there any hidden costs or tax implications to doing this?
Reply to Colin
- Michael Branson
  August 31st, 2024
  
  Hello Colin,
  I cannot provide legal or tax advice, so I strongly recommend contacting your accountant or attorney for assistance with these matters. However, I do have a question: Are your parents unable to live in the home due to health issues or other circumstances? They can remain in the home even after the line of credit is fully depleted without having to make any payments on the loan. Unless they are unable to stay in the home for some other reason, it may be unwise to give up the home, especially when they only need to cover taxes and insurance.
  Reply to Michael
Margaret H.
May 9th, 2024

What happens to any money left over in a HECM line of credit loan if the owner passes away?
Reply to Margaret
- Michael Branson
  May 13th, 2024
  
  Hello Margaret,
  Any money left on the line of credit is money that was never borrowed and, therefore, does not need to be repaid by the borrower's heirs after the borrower passes. For example, if the borrower has a line of credit available of $100,000 but only borrowed $50,000 of that money, there is not $50,000 of cash floating around that you need to worry about, but rather $50,000 that was never borrowed so the payoff of the loan would only be $50,000 and not the entire $100,000 (plus of course any interest that accrues on outstanding funds and any financed fees).
  They work the same way if you think about a standard Home Equity Line of Credit (HELOC) loan. If you have a line of credit but pay the loan off (or pass away) before you use the entire line amount, the lender doesn't do anything with the remaining funds that would have been available in the line. They just freeze the line at that point, and you would only owe the actual money you borrowed.
  Reply to Michael
Norma
April 24th, 2024

My parents home was appraised at $145,000 when they took out a HECM reverse mortgage. When they pass will the loan be capped at $145,000 and will the heirs be able to pay the $145,000 off to keep the home?
Reply to Norma
- Michael Branson
  April 27th, 2024
  
  Hi Norma,
  
  When your parents leave, the heirs will be able to repay the loan and keep the property if they wish for the lower of the amount owed on the loan or 95% of the current appraised value at that time.
  
  The initial appraised value is not a factor in the amount borrowers could ultimately borrow, considering the growth of credit lines, nor the ultimate amount that will be repaid, as many borrowers do not use all their reverse mortgage funds available. In the case of times when property values have fallen, family members have had to pay less than the original appraised value to keep the home even when the amount owed was higher than the original appraised value of the home after the borrower borrowed all available funds plus accrued interest for many years. But even when the amount owed exceeds the original appraised value, and no matter what the current value may be, the heirs always have the option to keep the home and pay the loan in full for the amount owed or 95% of the current appraised value at that time.
  
  So, the amount you will need to pay off to keep the home will depend not on the original appraised value but on the current balance of the loan and the current value of the property. If the amount owed is $100,000 and the current value is $200,000, the amount you would need to pay to repay the loan in full would be $100,000, or the loan's outstanding balance. If the current value was only $100,000 and the amount owed was $125,000, you could repay the loan in full and keep the property for $95,000 or 95% of the current market value. And, of course, heirs always have the option to walk away and owe nothing if that's what they choose to do.
  Reply to Michael
Leiland T.
August 29th, 2022

Hi ARLO,

My parents have a HECM. The current payoff is about $333,000. The maximum principal amount in the contract is $352,500. My parents took a lump sum at the beginning of the contract in 2009, $140,000. My question is, will the payoff on the HECM continue to rise at the 5.56% annual rate? My parents are in good health, and we do not anticipate them passing any time soon. The current market value of the home is well over the current payoff. Please advise. Thank you.
Reply to Leiland
- Michael Branson
  August 29th, 2022
  
  Hello Leiland,
  
  Yes, that loan will continue to accrue interest at 5.56% plus the MIP renewal (.50% if memory serves me correctly). They have the option to just let the balance continue to rise and continue to live in the home or they can choose to sell the home at this time and reinvest the equity in another property or wherever they choose.
  If you or you and your siblings (if you have any brothers and/or sisters) are able and are so inclined to do so, you can also choose to fund a family reverse for your parents if both you and your parents would like to do so.
  I would recommend that you speak with an attorney or accountant to establish it in the best possible way to avoid taxes but if this is something you all want to do, I have spoken with people in the past whose family tax advisers were able to set things up for them that they felt would benefit all parties and create the least tax burden on the heirs as a result while keeping the home in the family and preserving equity. I have not spoken with anyone who has done this for a while and tax laws are subject to change so I would strongly suggest you get competent legal and tax guidance before you do anything.
  
  I am aware that not all families have this option. Many borrowers opted for the fixed rate loan that required them to take a full draw and this option didn't help a lot of borrowers as it meant accruing interest on the entire balance from the start - even if they didn't need all the money. They can repay some of the funds if they wish to and do not believe they will need them if they are sitting in a bank savings account collecting very little interest. They need to know that if they do repay some of all the funds, on the fixed rate option, they can never repay the money and reborrow it - but there is no prepayment penalty.
  Depending on how much the home is worth over the current loan amount, they can choose to pay off the old loan with a new reverse mortgage and can opt for an adjustable loan that allows them to only borrow what they need. This means that if their new line available would give them more money now, but they don't need that money now, they do not need to take any advances and can leave the money in the line (which also grows on the unused portion of the line). Then the larger line gives them more money available to use later if they need it.
  
  It all depends on your goals. As you said, they are in good health and if you are looking to stop all interest accruing you may want to look for a way to eliminate the loan. If you want to find a way to get them the access to more money without having to be the source of those funds, you may want to check into a refinance into the line of credit program.
  Reply to Michael
Donna K.
April 27th, 2022

When we moved in 2015, we took out a HECM mortgage, we put down $100,000 on a sales price of $300,000. The value now is $370,000, my latest statement shows loan balance $280,000. If we sell, am I looking at the difference of the $280,000 minus the $370,000?
Reply to Donna
- Michael Branson
  May 2nd, 2022
  
  Hello Donna,
  That would be correct. The HECM loan balance has grown by $80,000 over the past 7 years with the interest accrual because you have not been required to make any mortgage payments during this time.
  With a standard or forward mortgage, you would have a larger equity position but would have been making those payments on a monthly basis.
  Reply to Michael
Michael
August 12th, 2019

I have been exploring the possibility of taking an HECM but the mortgage Insurance Upfront premium seems to make the product way overpriced. In California our home is worth well over $1 Million which would make our initial premium $14, 530. This seems extremely expensive. You would also have to pay interest and annual premium on the $14,530 balance. Sounds like a very bad deal to me.
Reply to Michael
- Michael Branson
  August 12th, 2019
  
  Hello Michael,
  
  The HUD mortgage insurance is required on all FHA reverse mortgages. Since your home is valued over $1,000,000, have you considered looking at the proprietary or jumbo reverse mortgage programs?
  They really are not too beneficial for borrower whose homes are worth less than $900,000 just to avoid paying the mortgage insurance premium but many borrowers in your position are pleased with the jumbo results and there is no mortgage insurance on the private programs.
  Reply to Michael

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