HECM/Reverse

What is a HECM/Reverse loan?

Do you want to get access to your home equity, but aren’t certain which option is right for your needs? The team at Certainty Home Lending can help. When looking to tap into home equity, homeowners need to choose the product that will work best for their unique situation. The reverse mortgage option is a beneficial product for those who are eligible, but what is it? Is it the same as a Home Equity Conversion Mortgage (HECM)?

Simply put, all HECM’s are a type of Reverse Mortgage, but not all Reverse Mortgages are HECM’s. Let’s look at the differences between the different types of reverse mortgages to explain the available choices.

What is a Reverse Mortgage?

A reverse mortgage loan is similar to a traditional mortgage in that it allows the homeowner to borrow money using their home as collateral. Unlike a traditional mortgage, there is no required monthly payment, and the loan balance grows each month. The title to the home remains in the borrower’s name, and the loan is repaid when the borrower no longer lives in the home. Most reverse mortgage loans today are a Home Equity Conversion Mortgage (HECM) which is insured by the Federal Housing Administration (FHA). Certainty Home Lending also offers proprietary or portfolio reverse mortgage loans. These are not insured by the government but may be available at higher loan amounts, or for borrowers as young as 55 depending on the state. Both products are reverse mortgages and share many characteristics.

How much can you borrow?

The amount of funds you can receive through a reverse loan depends on age, the value of your home, and current interest rates. Generally, the older you are and the more equity in your home, the more funds you can access.

Repayment

There is no payment required while the borrower occupies the property. The loan becomes due when the borrower no longer occupies the home as a primary residence. Generally, the borrower remains in the home for the rest of their life and the estate will be tasked with settling the balance. This can be achieved by selling the home with any remaining funds going to the estate, signing a Deed in Lieu over to the lender, or simply purchasing the home and paying off the loan. Since reverse mortgages are non-recourse, the estate can purchase the home for 95% of current market value even if the loan balance is higher. Keep in mind that you’re still responsible for taxes, insurance, and upkeep of the home.

Non-recourse loan

Reverse mortgage loans are non-recourse. This means that neither you nor your heirs can ever owe more than the home is worth. Even if the loan balance were to exceed the home value, the borrower will not be responsible.

Counseling requirement

Before obtaining a reverse loan, you must undergo counseling. The counselor will provide information about the loan, its implications, and other available options.

Homeownership & Obligations

A reverse mortgage allows homeowners to keep their property. They must still pay property taxes, insurance, association fees (if applicable), and maintain the home. They do not need to make monthly mortgage payments as long as they live in the home as their primary residence.

Qualifications

Unlike a traditional mortgage which takes debt to income (DTI) ratio into concern and credit scores into consideration, a reverse mortgage considers the borrowers ability to sustain their lifestyle over the period of the loan. Since there is no mortgage payment, the ability to qualify is typically much easier on a reverse mortgage.

How do you get the funds?

There are multiple options for you to access funds. You can take equal monthly payments for as long as you occupy the property as a primary residence, or equal monthly payments for a fixed period of months. You can also access as a line of credit at any time and amount of your choosing. You can even do a combination of the options above or a single lump sum disbursement. How you get the funds is really up to you! *

How is a HECM different?

A HECM is unique in that it is insured by FHA. The HECM program was born out of Congressional hearings in the 1980’s and specifically designed to allow seniors access to equity in their home. Since that time, the product has developed significantly through legislation and partnership with the American Association of Retired Persons (AARP). Consistent counseling policies have been developed, the HECM for Purchase (H4P) was established, and most recently guidelines to protect the consumers through creation of financial assessment guidelines have been mandated. The HECM program today is an exclusive program offered as a benefit to seniors that will continue to improve and adapt with time.

HECM eligibility

You must be at least 62 years old, occupy the property as your primary residence, have sufficient equity in the property, not be delinquent on any federal debt, and have financial resources to pay ongoing property charges such as insurance, property tax, association fees, etc.

HECM loan limits

The HECM maximum claim amount will increase from $1,089,300 in calendar year 2023 to $1,149,825 effective for FHA case numbers assigned on or after January 1, 2024. This maximum claim amount is applicable to all areas, including the special exception areas of Alaska, Hawaii, Guam, and the U.S. Virgin Islands.

Counseling

HECM requires the borrower to use a HUD approved housing counselor.

How is a portfolio or proprietary mortgage different?

Portfolio reverse mortgages are not insured by HUD, but offered through private lenders. They allow for greater flexibility because they aren’t restricted by the FHA loan limit or age restriction. So, they have higher loan amounts and for borrowers as young as 55 depending on the state. They are also unencumbered by FHA requirements on appraisal or property approval, and there is no mortgage insurance. Portfolio Mortgages may not have the same options for disbursing funds and, since HUD does not regulate Portfolio loans, they may not afford the same borrower protection—especially for non-borrowing spouses. Portfolio lenders do not require you to meet with a HUD approved counselor but will provide a separate list of eligible counselors. Be certain to discuss this with the counselor and the Certainty Home Lending Reverse Mortgage Specialist.

Which option is right for me?

HECM loans account for the vast majority of the Reverse mortgage market, but a portfolio loan may be a better fit for a homeowner with a primary residence valued over $1,089,300 who wants to get the most funds possible. You should research your options available and speak to one of our Reverse Mortgage Specialists. We can develop a comprehensive proposal to lay out all your options and guide you to the best decision!

Contact our team to talk to a HECM pro today and get the process started. The access you need to your home equity is a lot closer than you think!

* Borrowers who elect a fixed rate loan will receive a single disbursement lump sum payment. Other payment options are available only for adjustable rate mortgages. Charges such as an origination fee, mortgage insurance premiums, closing costs and/or servicing fees may be assessed and will be added to the loan balance. The loan balance grows over time, and interest is added to that balance. Interest on a reverse mortgage is not deductible from your income tax until you repay all or part of the interest on the loan. Although the loan is non-recourse, at the maturity of the loan, the lender will have a claim against your property and you or your heirs may need to sell the property in order to repay the loan or use other assets to repay the loan in order to retain the property. You should know that a reverse mortgage is a negative amortization loan which means that your mortgage balance will increase while your home equity decreases if you do not make principle and interest payments on your loan. This may make it more difficult to refinance the loan or to obtain cash upon the sale of the home. However, you will never owe more than the home is worth when the loan is repaid.

This is not a commitment to lend. The borrower must meet all loan obligations, including living in the property as the principal residence and paying property charges, including property taxes, fees, and hazard insurance. The borrower must maintain the home. If the borrower does not meet these loan obligations, then the loan will need to be repaid. Otherwise, the loan must be repaid when the last borrower passes away or sells the home. Prices, guidelines and minimum requirements are subject to change without notice. Some products may not be available in all states. Subject to review of credit and/or collateral; not all applicants will qualify for financing. It is important to make an informed decision when selecting and using a loan product; make sure to compare loan types when making a financing decision. This material has not been reviewed, approved or issued by HUD, FHA or any government agency. Certainty Home Lending is not affiliated with or acting on behalf of or at the direction of HUD, FHA or any other government agency. To find a Reverse Mortgage counselor near you, search the HECM Counselor Roster at https://entp.hud.gov/idapp/html/hecm_agency_look.cfm or call (800) 569-4287.

Applicant subject to credit and underwriting approval. Not all applicants will be approved for financing. Receipt of application does not represent an approval for financing or interest rate guarantee. Restrictions may apply, contact Certainty Home Lending for current rates and for more information. All information provided in this publication is for informational and educational purposes only, and in no way is any of the content contained herein to be construed as financial, investment, or legal advice or instruction. Certainty Home Lending does not guarantee the quality, accuracy, completeness or timelines of the information in this publication. While efforts are made to verify the information provided, the information should not be assumed to be error free. Some information in the publication may have been provided by third parties and has not necessarily been verified by Certainty Home Lending. Certainty Home Lending does not assume any liability for the information contained herein, be it direct, indirect, consequential, special, or exemplary, or other damages whatsoever and howsoever caused, arising out of or in connection with the use of this publication or in reliance on the information, including any personal or pecuniary loss, whether the action is in contract, tort (including negligence) or other tortious action. Certainty Home Lending does not provide tax advice. Please contact your tax adviser for any tax related questions.