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What is a FHA hecm loan?

HECM loan graphicA HECM loan is an abbreviation of the Home Equity Conversion Mortgage program, also known as a reverse mortgage. The reverse mortgage is a federally backed mortgage/loan for homeowners 62 years of age or older.

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

HECM property requirements

Eligible properties include one to four-unit homes, manufactured homes (built after June 1976), FHA approved condominiums, properties in planned unit developments (PUDs), townhouses, and properties held in a living trust. Newly constructed properties are eligible only if local authorities have issued a Certificate of Occupancy or its equivalent. Vacation homes and investment homes are not eligible. Only the primary residence qualifies for this loan.

Ineligible properties include cooperative units, boarding houses, bed, and breakfast establishments manufactured homes built before June 15, 1976, and manufactured homes lacking HUD certification labels or a permanent foundation.

Appraisal requirement

The property is the collateral against the HECM loan. The lender will only lend a percentage of the value of the home, and the only way to establish the home value is with the opinion of a licensed FHA approved appraiser. The cost for the appraisal is approximately $450 for a single-family residence or condominium. The appraisal cost is usually paid upfront at application. Effective Oct. 1, 2018, the FHA requires a risk assessment for HECM loans, which is used to determine if a second appraisal is needed before the loan can be approved. The cost associated with the second appraisal may be rolled into the closing costs. Lenders will be required to use the lower of the two appraised values for the HECM loan calculation. This change was made, due to inflated appraisals driving 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 expected interest rate is a hypothetical interest rate to determine the borrowing percentage. The expected interest rate is the sum of the 10-year LIBOR Swap Rate and the Lender's Margin. The intersection of the expected interest rate and age of the youngest borrower, or non-occupying borrower on the government chart is the principal limit factor/percentage. Reverse mortgage calculation

HECM payment options

There are six different ways you can receive the proceeds from a HECM loan (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?
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?
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 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?
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?
The lending limit is established by the Department of Housing and Urban Development. Currently (2021), the maximum loan limit is $822,375.