What are Reverse Mortgages?

There are several types of reverse mortgage products available to homeowners 62 and older, including the Home Equity Conversion Mortgage (HECM), the Fannie Mae Home Keeper, and the Financial Freedom Cash Account. However, the most popular and widely used program is the HUD-sponsored HECM program.

How the HECM Program Works

The HECM is the oldest and most popular reverse mortgage product. Available since 1989 to homeowners 62 or older, HECMs are insured by the federal government through the Federal Housing Administration (FHA), a part of the U.S. Department of Housing and Urban Development. The HECM FHA insured reverse mortgage can be used by senior homeowners age 62 and older to convert the equity in their home into monthly streams of income and/or a line of credit to be repaid when they no longer occupy the home. The HECM loan is funded by a lending institution such as a mortgage lender, bank, credit union or savings and loan association.

Unlike ordinary home equity loans, the HUD-sponsored HECM loan does not require repayment as long as the home is the borrower’s principal residence. Lenders recover their principal, plus interest, when the home is sold. The remaining value of the home goes to the homeowner or to his or her survivors. The homeowner can never owe more than their home’s value, and can continue to live in the home without repayment indefinitely, so long as the home is maintained in good repair and all taxes are paid and current.

If the sales proceeds are insufficient to pay the amount owed, HUD will pay the lender the amount of the shortfall. HUD’s Federal Housing Administration (FHA) collects an insurance premium from all borrowers to provide this coverage.

The amount a homeowner can borrow depends on their age, the current interest rate, other loan fees and the appraised value of their home or FHA‘s mortgage limits for their area, whichever is less. Generally, the more valuable your home is, the older you are and the lower the interest, the more you can borrow.

For example, based on a loan with an interest rate of approximately 9 percent, and a home qualifying for $100,000, a 65 year old could borrow up to 22 percent of the home’s value; a 75 year old could borrow up to 41 percent of the home’s value; and an 85 year old could borrow up to 58 percent of the home’s value. The percentages do not include closing costs because these charges can vary. There are no asset or income limitations on borrowers receiving HUD’s reverse mortgages and the reverse mortgage loan proceeds are tax free. There are also no limits on the value of homes qualifying for a HUD reverse mortgage. The value of the home will be determined by an independent appraisal. However, the amount that may be borrowed is capped by the maximum FHA mortgage limit for the area, which varies from $172,632 to $312,895.

For Alaska, Guam, Hawaii and the Virgin Islands, the FHA mortgage limits may be adjusted up to 150 percent of the ceiling depending on the area. The FHA limits usually increase each year. As a result of the caps, owners of higher-priced homes can’t borrow any more than owners of homes valued at the FHA limit.

Borrower Requirements:

• Age 62 years of age or older
• Own your property
• Occupy your property as primary residence
• Must participate in a consumer information given by an approved HECM counselor

Mortgage Amount Is Based On These Factors:

• Age of the youngest borrower
• Current interest rate
• Appraised value or the FHA insurance limit, whichever is lower

Financial Requirements:

• No income or credit qualifications are required of the borrower
• No repayment as long as the property is the primary residence
• Closing costs may be financed in the mortgage

Property Requirements:

• 1 family home or 1–4 unit home with one unit occupied by the borrower
• Condominiums or Planned Unit Developments (PUD) must be HUD- FHA approved
• Cooperatives that meet HUD guidelines
• Mobile Homes that meet HUD guidelines
• Qualifying home must meet minimum property standards. However, borrower may fund repairs in the mortgage

More information on reverse mortgages and the specific programs available in your area can be found at the National Reverse Mortgage Association website, the AARP website or the HUD website on Reverse Mortgages.