How the HECM Program Works | HUD.gov / U.S. Department ...

How the HECM Program Works

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There are many factors to consider before deciding whether a HECM is right for you. To aid in this process, you must meet with a HECM counselor to discuss program eligibility requirements, financial implications and alternatives to obtaining a HECM and repaying the loan. Counselors will also discuss provisions for the mortgage becoming due and payable. Upon the completion of HECM counseling, you should be able to make an independent, informed decision of whether this product will meet your specific needs. You can search online for a HECM counselor or call (800) 569- toll-free.

There are borrower and property eligibility requirements that must be met. You can use the listing below to see if you qualify. If you meet the eligibility criteria, you can complete a reverse mortgage application by contacting a FHA-approved lender. You can search online for a FHA-approved lender or you can ask the HECM counselor to provide you with a listing. The lender will discuss other requirements of the HECM program, such as first year payment limitations, available payment options, the loan approval process, and repayment terms.

Borrower Requirements

You must:

• Be 62 years of age or older
• Own the property outright or paid-down a considerable amount
• Occupy the property as your principal residence
• Not be delinquent on any federal debt
• Have financial resources to continue to make timely payment of ongoing property charges such as property taxes, insurance and Homeowner Association fees, etc.
• Participate in a consumer information session given by a HUD- approved HECM counselor

Property Requirements

The following eligible property types must meet all FHA property standards and flood requirements:

• Single family home or 2-4 unit home with one unit occupied by the borrower
• HUD-approved condominium project
• Individual Condominium Units that meet FHA Single Unit Approved requirements
• Manufactured home that meets FHA requirements

Financial Requirements

• Income, assets, monthly living expenses, and credit history will be verified
• Timely payment of real estate taxes, hazard and flood insurance premiums will be verified

Payment Plan Options

For adjustable interest rate mortgages, you can select one of the following payment plans:

• Tenure - equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence
• Term - equal monthly payments for a fixed period of months selected
• Line of Credit - unscheduled payments or in installments, at times and in an amount of your choosing until the line of credit is exhausted
• Modified Tenure - combination of line of credit and scheduled monthly payments for as long as you remain in the home
• Modified Term - combination of line of credit plus monthly payments for a fixed period of months selected by the borrower

For fixed interest rate mortgages, you will receive the Single Disbursement Lump Sum payment plan.

Mortgage Amount Based On

The amount you may borrow will depend on:

• Age of the youngest borrower or eligible non-borrowing spouse
• Current interest rate; and
• Lesser of:
  • appraised value;
  • the HECM FHA mortgage limit ($1,149,825 in CY ); or
  • the sales price (only applicable to HECM for Purchase)

If there is more than one borrower and no eligible non-borrowing spouse, the age of the youngest borrower is used to determine the amount you can borrow.

HECM Costs

You can pay for most of the costs of a HECM by financing them and having them paid from the proceeds of the loan. Financing the costs means that you do not have to pay for them out of your pocket. On the other hand, financing the costs reduces the net loan amount available to you.

The HECM loan includes several fees and charges, which includes: 1) mortgage insurance premiums (initial and annual) 2) third party charges 3) origination fee 4) interest and 5) servicing fees. The lender will discuss which fees and charges are mandatory.

You will be charged an initial mortgage insurance premium (MIP) at closing. The initial MIP will be 2%. Over the life of the loan, you will be charged an annual MIP that equals 0.5% of the outstanding mortgage balance.

1. Mortgage Insurance Premium
   You will incur a cost for FHA mortgage insurance. The mortgage insurance guarantees that you will receive expected loan advances. You can finance the mortgage insurance premium (MIP) as part of your loan.

2. Third Party Charges
   Closing costs from third parties can include an appraisal, title search and insurance, surveys, inspections, recording fees, mortgage taxes, credit checks and other fees.

3. Origination Fee
   You will pay an origination fee to compensate the lender for processing your HECM loan. A lender can charge the greater of $2,500 or 2% of the first $200,000 of your home's value plus 1% of the amount over $200,000. HECM origination fees are capped at $6,000.

4. Servicing Fee
   Lenders or their agents provide servicing throughout the life of the HECM. Servicing includes sending you account statements, disbursing loan proceeds and making certain that you keep up with loan requirements such as paying real estate taxes and hazard insurance premium. Lenders may charge a monthly servicing fee of no more than $30 if the loan has an annually adjusting interest rate or has a fixed interest rate. The lender may charge a monthly servicing fee of no more than $35 if the interest rate adjusts monthly. At loan closing, the lender sets aside the servicing fee and deducts the fee from your available funds. Each month the monthly servicing fee is added to your loan balance. Lenders may also choose to include the servicing fee in the mortgage interest rate.

What is HECM for Purchase?

A Home Equity Conversion Mortgage (HECM) for Purchase is a reverse mortgage that allows seniors, age 62 or older, to purchase a new principal residence using loan proceeds from the reverse mortgage. 

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Real estate professionals who are interested in learning more about HECM for Purchase can download free resources from NRMLAonline.org

What&#;s different about HECM for Purchase versus a traditional mortgage?

Borrower age:

&#; HECM for Purchase: Exclusively for home buyers age 62+.
&#; Traditional mortgage: No age restriction (except being legal age to enter a contract). 

Repayment requirements

&#; HECM for Purchase: Flexible repayment feature &#; The borrower can choose to repay as much or as little as they like each month,  or make no monthly principal and interest payments. The flexible repayment feature makes it easier for a buyer to afford the home they really want, preserve more savings and retirement assets, and improve cash flow. As with any mortgage, the borrower must keepcurrent with property-related taxes, insurance and maintenance as part of their ongoing loan obligations. Repayment is generally required once they sell the home, pass away, move out or fail to meet their loan obligations.

 &#; Traditional mortgage: Monthly principal and interest payment required. Builds equity as the loan is paid down. 

Down payment amount

&#; HECM for Purchase: Required down payment between approximately 45% and 62% of the purchase price, depending on buyer&#;s age or Eligible Non-Borrowing Spouse&#;s age, if applicable. (This range assumes closing costs will be financed.) The rest of the funds for purchase come from the HECM loan. This allows the buyers to keep more assets to use as they wish, as compared to paying all cash, while still having the flexibility of no required monthly mortgage payments. 

&#; Traditional mortgage: Typically requires a smaller down payment.

 Eligible properties

&#; HECM for Purchase: Single-family homes; FHA-approved condominiums; townhouses or Planned Unit Developments (PUDs); 2-to-4 unit homes that are owner-occupied; and manufactured homes meeting HUD guidelines.

&#; Traditional mortgage: Single-family homes; condominiums; townhouses or Planned Unit Developments (PUDs); 2-to-4 unit homes that are owner-occupied; manufactured housing; second homes; vacation homes; and investment properties.

 Protection against owing more than home is worth

&#; HECM for Purchase: A Federal Housing Administration (FHA)-insured* program, HECM for Purchase has a non-recourse feature, which means the borrower can never   owe more than the home is worth when the loan is repaid. The home is the only source of repayment regardless of the loan balance at maturity.

&#; Traditional mortgage: Most do not have a non-recourse feature. Since home values can decline, the borrower could owe more than the home is worth.

How are loan amounts calculated?

The buyer&#;s minimum required down payment generally works out to be about 45% to 62%* of the sale price. This calculation  is determined by the Department of Housing and Urban Development (HUD).&#; These are age-based loans that allow older borrowers to qualify for more in loan proceeds (see chart below).

*Example shown is for illustrative purposes only. Actual down payment amounts vary based on interest rate, borrower age and other factors. This range assumes closing costs will be financed into the loan. Closing costs include an up-front mortgage premium of 2% of the property value and can include other lender and third party closing costs such as an origination fee, title insurance, appraisal fee, credit report fee and recording costs, among other costs. In addition to initial MIP, closing costs typically range from $10,000 to $15,000. Ask your lender or mortgage originator for more details.

&#;This material has not been reviewed, approved or issued by HUD, FHA or any government agency. NRMLA is not affiliated with or acting on behalf of or at the direction of HUD/FHA or any other government agency.

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