A Reverse Mortgage is a loan that allows qualifying homeowners to convert a portion of the equity in their home into cash. A Home Equity Conversion Mortgage (HECM) loan, also known as a Reverse Mortgage, does not become due as long as the borrowers live in the home as their primary residence and continue to meet the obligations of the mortgage, including paying property taxes and insurance on the home.
A HECM loan is insured by the Federal Housing Administration (FHA). Loan proceeds can be used to pay medical bills, to finance living expenses, in-home care, your dream vacation or any extra cash can be saved for unexpected expenses. Like with all Reverse Mortgage loan products, certain eligibility requirements must be met. Borrowers must be 62 years of age or older and own the property outright or have paid down a considerable amount. Borrowers must live in the home as their primary residence and cannot be delinquent on any federal debt. Borrowers must meet financial eligibility criteria as established by HUD. They must also meet with a HUD approved Reverse Mortgage Counselor prior to applying for a Reverse Mortgage loan.
To be eligible for a Reverse Mortgage loan, the property must also meet certain eligibility requirements. The property must be a single family home, a 2-4 unit owner occupied house*, a HUD-approved condominium or a manufactured home that meets FHA requirements.
With a HECM, the borrower is required to pay an initial Mortgage Insurance Premium (MIP), as well as an annual MIP of 1.25 percent. (Please see chart below for more detail regarding the initial MIP.) The borrower must also pay an origination fee, title insurance and other closing costs (see Fees).
Reverse Mortgage - MIP Chart
Borrowers may receive their loan funds through monthly installments, a lump sum, as a line of credit or through a combination of these options. The amount of the loan depends on the age of the youngest borrower, the interest rate, and the lesser of the appraised value of the home, sale price or maximum lending limit. The funds available to you may be restricted for the first 12 months after loan closing, due to HECM requirements. The borrower may need to set aside additional funds from the loan proceeds to pay for taxes and insurance. Consult a Liberty advisor for detailed program terms. The proceeds are tax-free; however it is always best to consult a financial professional. In addition, provided the home is sold to repay the loan, borrowers’ heirs will not be personally liable if the loan balance exceeds the value of the home.
*Not applicable to HECM for Purchase
HECM for Purchase
You may be able to use a HECM for Purchase reverse mortgage loan to buy your next home. Some eligibility requirements are:
The youngest titleholder must be 62 years or older
The purchased home will be occupied within 60 days of closing
The purchased home must be your primary residence
You must meet financial eligibility criteria as established by HUD
You may need to set aside additional funds from the loan proceeds to pay for taxes and insurance
The difference between the purchase price of the home and the HECM proceeds will be paid in cash from the sale of an existing home or another source of eligible funds
Gift funds may be an acceptable form of down payment, however certain restrictions may apply
If the homeowner is using cash, the cash must be seasoned for 60 days
There must be proof that the homeowner has “eligible funds” from qualifying sources for the closing. Depending on the source of funds, specific documentation may be required.
The property must be a primary residence and can be a:
Single family home
FHA approved condominiums
Ineligible property types include
Newly constructed principal residences where a Certificate of Occupancy or equivalent has not been issued by the appropriate local authority
Bed and Breakfast establishments
Liberty does not offer HECM for Purchase loans on multi-unit properties
All major home repairs must be completed by the property seller before the loan can close:
Property must meet FHA’s minimum property requirements
Critical health, safety and structural integrity issues must be repaired
Repair set-asides are not permitted with the HECM for Purchase
The buyer cannot pay for any repairs before they own the home
The repairs must be included in the purchase agreement
With a HECM for Purchase loan the usual costs associated with selling and buying a property will apply as well as the fees associated with a reverse mortgage loan.
Compare HECM to HELOC
A Home Equity Line of Credit is a revolving loan that is secured by the value of your home with spending limitations similar to that of a credit card. You may not exceed the maximum credit limit and, similar to a traditional mortgage, you will make monthly payments for a fixed term.
Unlike a Home Equity Line of Credit (HELOC), the HECM does not require the borrower to make monthly mortgage payments and any existing mortgage or mandatory obligations can be paid off using the proceeds from the reverse mortgage loan. Many seniors use the remaining proceeds to fund medical expenses, make home repairs or just keep the extra cash in case of an emergency.
With the HECM, repayment is not due as long as you live in the home as your primary residence, continue to pay required property taxes and homeowners insurance, and maintain the home according to FHA requirements. Provided the home is sold to repay the loan, you or your heirs will never owe more than the loan balance or the value of the property, whichever is less; and no assets other than the home must be used to repay the debt. Your heirs will receive any remaining equity after paying off the reverse mortgage.
A HELOC’s interest rates are usually higher than a first mortgage loan and require monthly loan payments. A HELOC will also generally require you to maintain a certain level of equity in your home or the HELOC may be closed. And with the recent tightening of the financial market, many lenders have discontinued or significantly revised their HELOC programs, making access more difficult. With the HECM, homeowners have an alternative to the HELOC.
Benefits of a HELOC:
Lower interest rates in most cases
Lower upfront costs
May be more suitable for short term-needs
Benefits of a HECM:
Loan does not become due as long as all the loan obligations are met*
Line of credit cannot be frozen due to changing market values*
No monthly mortgage payments*
* The borrower must live in the home as their primary residence, continue to pay required property taxes, homeowners insurance and maintain the home according to Federal Housing Administration requirements.