The decision to take out a Home Equity Conversion Mortgage is big, and you may be wondering how safe this government-insured loan program is. While reverse mortgages aren’t suitable for everyone, the HECM program has several built-in protections to keep borrowers safe.
Safeguard #1 – Federal guarantee
One of the program’s most significant protections is that the FHA insures it. (Federal Housing Administration). You, as the borrower, pay an upfront mortgage insurance premium when you take out a reverse mortgage that varies depending on the loan program you choose.
You will also finance an annual mortgage insurance premium of .50% of the mortgage balance.
FHA mortgage insurance provides protections for borrowers: In the event something were to happen to your lender, and they went out of business, the FHA insurance guarantees you will still have access to your loan proceeds.
Safeguard #2 – Non-recourse feature
Another borrower protection built into the reverse mortgage program is that the loan is non-recourse in nature. That means even if your reverse mortgage loan exceeds your home’s value, you will never have to repay more than what your home is worth at the time of sale.
The non-recourse aspect also applies to your estate: when you pass away, your heirs will not have to pay back the lender more than the home’s value at the time of sale if the loan balance exceeds it.
Safeguard #3 – Required Counseling
All prospective HECM borrowers must first undergo counseling through a Department of Housing and Urban Development-approved, third-party counseling agency.
The counseling aims to ensure you understand how the loan works and how it could apply to your particular situation. Counseling sessions also allow you to ask any questions you might have.
Counselors will assess your knowledge of the product before granting a certificate that enables you to proceed with the loan application process. Because a third-party agency conducts counseling, you can rest assured that you are getting objective information from someone with your interests at heart.
The counseling is meant to educate you to make an informed decision. (View a list of HUD-approved counselors here)
Safeguard #4 – Cross-selling ban
Reverse mortgage originators are forbidden from “cross-selling” certain financial products under the Housing and Economic Recovery Act of 2008. In other words, they’re not allowed to originate a reverse mortgage and require you to purchase a financial product or insurance investment with them.
In addition, reverse mortgage lenders are prohibited from being associated with or participating in selling other sorts of financial or insurance products.
Although you, as a borrower, are free to do with your proceeds as you wish, this rule protects you from unscrupulous lenders who might steer you into buying a product you don’t want or need.
Are you a candidate?
Reverse mortgages are not for everyone, and there are a couple of situations where the loan might not be the best option. The goal of HECMs is to help people age in place in their homes.
If you have a health condition or any other reason that would necessitate a move out of your home in the near future, a reverse mortgage may not be the best fit. Additionally, suppose you are planning on traveling extensively. In that case, a reverse mortgage may not be your best option since you must maintain a primary residence in the home and live there for most of each year.
If you’re considering using the HECM program, you can rest assured that the product is absolutely safe and contains multiple built-in safeguards to protect borrowers.
Top 5 FAQs
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