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 FHA-backed reverse mortgages 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 for the purchase and reverse mortgage into a single charge.
- Refinance: Designed for seniors already holding a reverse mortgage, 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.
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, reverse mortgage 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 HECM for 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 mortgage and buy another home in two separate transactions, the HECM for 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
A wide range of residences qualify for an HECM for Purchase plan, including:
- Single-family homes
- 2- to 4-unit homes (one unit occupied by the borrower)
- Condominiums approved by HUD
- Manufactured homes with FHA-approval
- 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.
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 reverse mortgage offers 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 mortgage 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
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.