Home Equity Conversion Mortgage (HECM)
What is a HECM?
The Home Equity Conversion Mortgage (HECM) is Federal Housing Administration’s (FHA) reverse mortgage program which enables you to withdraw some of the equity in your home. You choose how you want to withdraw your funds, whether in a fixed monthly amount or a line of credit or a combination of both. You can also use a HECM to purchase a primary residence if you are able to use cash on hand to pay the difference between the HECM proceeds and the sales price plus closing costs for the property you are purchasing.
The concept of a reverse mortgage originated in the mid 1960’s. In 1989, recognizing the incredible financial benefits this program offered, HUD was asked to take control of the program, eliminate some of the risks and insure the loans.
To be eligible for a reverse mortgage, borrowers must meet three essential requirements. You Must:
- Be at least 62 years of age
- You must live in the home as your primary residence. A reverse mortgage cannot be used for a second home or investment property.
- You must have paid off much or all of your traditional mortgage.
In addition to the three essential requirements above, you’ll also have to meet several other guidelines to qualify for a reverse mortgage.
-The home maintenance must be up-to-date. After you apply for a reverse mortgage, your home will be appraised. During this process, the appraiser will note any deficiencies in the condition of your home that require repair. Typical deficiencies identified in an appraisal include: peeling paint, roofing problems, inoperable heating/air-conditioning systems, broken windows, missing handrails and inadequate electrical systems. While most repairs (and all major repairs) will need to be completed prior to closing, sometimes the lender can allow a set-aside to help pay for the cost of repairs. With a set-aside, a portion of your loan proceeds will be held to cover these costs.
-You must be financially capable of maintaining your home. As the homeowner, you will still be responsible for paying your homeowner’s insurance and real estate taxes and making home repairs.
The Federal Housing Administration (FHA) requires a financial assessment to determine homeowners’ willingness and capability to remain current on their obligations and ensure they qualify. During this assessment, we will review your credit history, analyze your income and compare it with your expenses. Potential borrowers who come up short financially may be able to set money aside from their reverse mortgage to cover those future expenses.
- Your type of home must be eligible. Single family homes and two-to-four unit homes qualify as long as one unit is occupied by the borrower. Condominiums that meet the U.S. Department of Housing and Urban Development’s FHA approval requirements also are eligible.
Home Equity Conversion Mortgage for Home Purchase
Did you know senior borrowers age 62 and older can use a Home Equity Conversion Mortgage (HECM) to purchase a home? Many senior borrowers have heard about the benefits of paying off an existing mortgage utilizing a reverse mortgage. However, many are still unaware that they can also purchase a new home by combining a reverse mortgage with a down payment. This enables senior borrowers to purchase a new home without having to worry about making monthly mortgage payments (borrowers must remain current on property taxes, homeowner’s insurance and HOA dues)! The HECM for home purchase also has limited income and credit requirements, has many consumer safeguards, is FHA-Insured and HUD regulated!