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What is a FHA hecm loan?

HECM loan graphicThe Home Equity Conversion Mortgage program, often known as a reverse mortgage, is abbreviated as a HECM loan.
The reverse mortgage is a government-backed mortgage or loan for homeowners aged 62 and up.

A HECM enables eligible homeowners to borrow against a portion of the equity that they have built up in their home.

HECM property requirements

One- to four-unit residences, prefabricated homes (constructed after June 1976), FHA-approved condos, properties in planned unit developments (PUDs), townhouses, and properties owned in a living trust are all eligible.

Only newly built properties that have received a Certificate of Occupancy or its equivalent are eligible. Vacation and investment properties are not eligible.
This loan is only available for the main home.

Cooperative units, boarding houses, bed and breakfast businesses, mobile homes constructed before June 15, 1976, and manufactured homes without HUD certification markings or a solid foundation are all ineligible.

Appraisal requirement

The property serves as security for the HECM loan. The lender will only lend a portion of the home's worth, and the only method to determine the home's value is to consult with a certified FHA authorized appraiser.

The appraisal fee for a single-family home or condominium is about $450. Typically, the appraisal fee is paid in whole at the time of application. The FHA now demands a risk assessment for HECM loans, which is used to evaluate if a second appraisal is required before the loan may be authorized.

The cost of the second appraisal may be included in the closing expenses.
Lenders will be obliged to calculate HECM loans using the lower of the two appraised values. This modification was made as a result of exaggerated assessments pushing up the cost of the HECM loan program.

HECM maximum claim amount

Only the federal government could come up with the term "maximum claim amount". The maximum claim amount is the maximum borrowing limit on a HECM/reverse mortgage. The lending limit is a moderately confusing formula.

The first step to determine how much money an applicant can obtain is to locate the borrowing percentage from a government chart, called the principal limit factor/percentage. The FHA uses the "expected interest rate" and the age of the youngest borrower (or non-borrowing spouse to arrive at the principal limit factor.

The anticipated interest rate is a simulated interest rate used to calculate the borrowing percentage. The anticipated interest rate is calculated by adding the 10-year LIBOR Swap Rate and the Lender's Margin. The principle limit factor/percentage is the intersection of the anticipated interest rate and the age of the youngest borrower, or non-occupying borrower, on the government chart.

Reverse mortgage calculation

HECM payment options

The proceeds from a HECM loan can be received in six different ways (see payment options):

  • lump-sum payment
  • line of credit that you can draw upon as needed,
  • equal monthly payments
  • or pick some combination of these options.

First year lending limitation

The reverse mortgage program limits the lump-sum withdrawal during the first year or at settlement to 60% of the maximum claim amount (maximum borrowing limit). There is an exception to the 60% withdrawal limit if the borrower is paying off an existing mortgage. The borrower is also permitted to obtain 10% of the loan limit as a lump sum under this option.

Reverse mortgage interest rates

The interest rates on a HECM/reverse mortgage are not regulated by the federal government. The interest rates are set by the reverse mortgage lenders. The reverse mortgage program only permits fixed interest rates for the lump-sum withdrawal option. The other payment choices (i.e. term, tenure, line of credit, etc.) are adjustable interest rates. The (potential) problem with adjustable interest rates on a reverse mortgage is that IF the interest rate increases substantially over the life of the borrower, the increased interest cost on the borrowed money can eat away at the home equity.

Home borrower counseling

The Home Equity Conversion Mortgage program requires borrowers to complete a home borrower course so that the borrower fully understand the reverse mortgage program.

The counseling session must be completed before the loan application. The counseling consultation can be taken over the phone or in person. The borrower usually pays for the counseling requirement. The cost is approximately $125.

Additional requirements

Borrowers may not be delinquent on any federal debt

Rotating question markFrequently Asked Questions About HECM loans

Q. Can you get a reverse mortgage if your home is not paid off?
A.
The existing mortgage/loan will be paid off with a reverse mortgage, provided that the reverse mortgage amount covers the existing loan balance and closing costs and any other approval requirements

Q. Is it hard to qualify for a reverse mortgage?
A.
Qualifying for a reverse mortgage is less difficult than a traditional mortgage because there are no debt to income requirements and credit score prerequisites. The reverse mortgage depends primarily on the home's equity.

Q. Is a reverse mortgage a ripoff?
A.
A reverse mortgage is a lending option that is largely dependent on the home's equity. No income is required with reverse mortgages and although there are some credit limitations (i.e. delinquent federal debt and existing judgments), qualifying for a reverse mortgage is less restrictive than a traditional mortgage or home equity loan. The reverse mortgage and accrued interest is paid off when the home is sold or voluntarily paid off. The loan fees can be excessive; however, the closing/processing expenses can vary between lenders. Prospective borrowers are encouraged to shop lenders for their costs and interest rate.

Q. Which is better, a home equity loan or a reverse mortgage?
A.
The home equity loan is likely to have a higher lending limit than a reverse mortgage and less closing/processing costs; however, the home equity loan requires recurring loan payments and stiffer qualifying criteria.

Q. What is the maximum amount you can borrow on a reverse mortgage?
A.
The lending limit is established by the Department of Housing and Urban Development. Currently (2021), the maximum loan limit is $822,375.