Home Equity Conversion Mortgage (HECM): HUD Reverse Mortgage Programs
The Home Equity Conversion Mortgage (HECM) remains the most-popular reverse mortgage program in the U.S. This is probably because of its advantage in offering lower interest rates to borrowers over proprietary reverse mortgage programs since they are backed by HUD’s Federal Housing Administration (FHA). An HECM is for homeowners that are 62-years-old and it allows them to convert their home’s equity into cash. Equity payment options include lump sums, lines of credit, and monthly payouts. Borrowers must live in the home. They are not required to repay the mortgage until they sell the home, move to another property, or pass away.
HUD offers three HECM programs:
- Traditional: The traditional option is a reverse mortgage based on the home’s equity and the borrower’s age, with the value capped at $636,150 (set each year). Consumers can get a HUD reverse mortgage with either fixed or adjustable rates.
- Purchase: The HECM for Purchase program aims to assist consumers that are 62 and over to buy another property and get a reverse mortgage in the same transaction. The program rolls the dual closing costs into a single charge.
- Refinance: Designed for seniors already holding a reverse loan, this refinance program can be used to modify their mortgage for better interest rates, add their spouses to the mortgage, or increase valuation, potentially resulting in higher monthly cash amounts.
Insured by the U.S. Department of Housing and Urban Development (HUD), HECMs have no restrictions on how consumers use the money. Since there’s a potential risk of over-spending lump sums, applicants must undertake reverse mortgage counseling as part of the loan process and to fulfill requirements.
What is the Difference between a Traditional Reverse Mortgage and an HECM for Purchase?
In a nutshell, a traditional HECM is an avenue for senior homeowners to receive cash in exchange for a portion of their home’s equity for as long as they remain in their existing home. They are allowed up to a one-year absence from the house to live in an assisted living or nursing home before the mortgage repayment becomes due. With a traditional reverse mortgage, qualifying homeowners can delay social security and let their retirement accounts grow. This option can also augment retirement income to pay medical bills or other outstanding loans. According to HUD, participants must maintain the home as their principal residence, and pay all taxes and insurance.
The HECM for Purchase Program was created in 2009 to assist homeowners over the age of 62 to buy another home using the proceeds from a new reverse mortgage. Borrowers have to prove that the new home offers the necessary physical features (single-level properties, handrails, wider doorways, ramps) that would otherwise cost too much if they were to retrofit their existing homes. They can also participate in the Purchase Program if the move puts the senior in closer proximity to family or caregivers. If they are buying a new home, HUD requires the new residence to be 100% complete at the time of inspection.
How Does the HECM for Purchase Program Work?
The HECM for Purchase Program allows qualified senior homeowners to buy a home and take out a reverse mortgage within a single transaction. It offers substantial savings. Rather than paying two sets of closing costs and fees, like a borrower would if they were to take out a reverse loan and buy another home in two separate transactions, the purchase program lumps those costs into one loan. The typical up-front costs include:
- Origination fee
- Closing costs (title insurance, appraisal, and inspection fees)
- Mortgage insurance premium
- Reverse mortgage counseling
To qualify for an HECM for Purchase, borrowers 62 years or over must be able to cover the down payment on the new residence through the home’s equity and/or available cash. LendingTree’s Reverse Mortgage Calculator can estimate how much money the property owner can receive to use toward the purchase of a new home. Any difference between the new home price and the proceeds of the loan must be paid by the borrower’s cash reserves, assets, or the sale of the home.
A wide range of residences qualify for the purchase program, including:
- Single-family homes
- 2- to 4-unit homes (one unit occupied by the borrower)
- Condominiums approved by HUD
- Manufactured homes with FHA-approval
Properties that are NOT eligible to buy under the HECM for Purchase Program are:
- Cooperative units
- Newly built residences where a Certificate of Occupancy has not been issued
- Bed and breakfast homes
- Boarding houses
- Manufactured homes built before June 15, 1976, or those built after June 15, 1976, that do not conform to the Manufactured Home Construction Safety Standards.
With both traditional reverse mortgages and HECM for Purchase, the loan balance continues to increase over time. However, the balance cannot exceed the value of the home. With the purchase program, the borrower or heirs can receive funds from the equity remaining when the balance of the new mortgage is repaid. However, in many cases, there is only a small amount of equity remaining in the home at the end of the process.
The age of the youngest borrower (or non-borrowing spouse), the appraisal value of the property, the mortgage insurance premiums, and the current interest rate determines the total allowable amount.
Up-front costs can vary considerably from lender to lender. Search the best rates by getting free offers from top lenders at LendingTree.
Can I Refinance an HECM?
You can refinance reverse mortgages to pay off an existing reverse loan. An HECM to HECM Refinance (H2H Refi) can make sense to free up more cash if:
- The initial reverse loan was obtained when the lending limit was capped considerably below today’s limits
- Home value has increased substantially
- Interest rates are more favorable than they were at the time of the original loan
- The borrower wishes to change from an adjustable-rate to a fixed-rate loan
- The home owner’s spouse is now 62 years or over and qualifies for protection on the title
With refinancing, the Initial Mortgage Insurance Premium (IMIP) amount is credited, deducting the amount from the new MIP.
To qualify for an H2H Refi, homeowners must still have significant equity in the property and pass what is called a “5-times benefit” assessment. For example, if the new closing costs are $3,000, the owner must receive at least $15,000 in additional cash from the H2H Refi. In addition, the available benefit amount generated by the refi must be at least 5% of the borrower’s net principal limit. If the borrower fails the 5% test, they may still qualify for the refi by attending a HUD counseling session again.
As part of the H2H Refi, the borrower must provide documentation of the original maximum claim amount, the current payoff amount, and the current principal limit.
To summarize, an H2H Refi can be a good option for those who can benefit from an increased credit line that offsets the closing costs by a factor of five. Counseling is typically waived if the owner first received an HECM five years or less before applying for the refinance. However, some states require counseling regardless of whether the FHA agrees to waive the session.