HECM Saver Program Replaced by New Rules

‚ÄčIn late 2013, FHA gutted its reverse mortgage (called the Home Equity Conversion Mortgage or HECM) in order to decrease losses from the program. Too many borrowers immediately pulled their maximum allowable cash as soon as they closed, which left them no available funds down the road. Due to bad luck or financial mismanagement, many of these people ended up in financial ruin with no home equity to help them out.

Saver Program Saves Money

The HECM Saver plan was created to save seniors money on their mortgage insurance and also prevent them from maxing out their home equity draws. However, it was unsuccessful. The much lower cost was less appealing than the wad of cash the Standard program offered, so the Saver program never really caught on.

Saver Program Discontinued

The Saver program has been eliminated and upfront draws are limited under these rules: Borrowers can no longer draw 100 percent of their maximum upfront except for these purposes:

  • Paying off all liens on the property including the senior's existing mortgage
  • All settlement costs
  • Any repairs needed to meet FHA property requirements

Cash draws within the first year for other than the above purposes are limited to 60 percent of the maximum (after the above mandatory draws) or to 10 percent of the maximum, whichever is greater. For example, if a homeowner's maximum borrowing is set at $100,000, he or she can take up to $60,000 at closing if there are no liens. If there's $75,000 mortgage against the property, he or she has to pay it off with the reverse mortgage and can take an additional $10,000 (10 percent of the max) at closing, leaving $15,000 available for the future.

More HECM Rules

  1. There are still two tiers of mortgage insurance premiums, depending on the amount of cash drawn down in the first year. Those who draw less will pay mortgage insurance of .5 percent, while those who draw more pay 2.5 percent -- five times as much!
  2. Fixed-rate reverse loans are much less appealing. While borrowers with fixed-rate HECMs have always been required to draw all available cash at closing, this was fine with them as long as they had access to 100 percent of their maximum cash. However, under the new rules limiting what can be withdrawn, the only seniors likely to choose a fixed-rate HECM are those with large mortgage balances -- suppose the borrower in the examples above had a $100,000 limit and a $90,000 mortgage? He or she would be able to pay that off, take an additional $10,000 and get the whole $100,000.
  3. For adjustable-rate HECMs, borrowers are bound by limits on cash draws at closing, but after a year they can draw the remainder of their available money.
  4. Maximum limits have been lowered. Under the new rules, homeowners of a given age and a given amount of equity in their home cannot borrow as much in total as they could in the past.

In 2014, HECM rules changed again for those with non-borrowing spouses -- the maximum borrowing is calculated based on the age of the younger spouse even if he or she is not obligated by the loan. This is to allow the younger spouse to continue to live in the home if the older one dies.

HECMs continue to become increasingly complicated. That's one reason HUD requires reverse mortgage counseling before homeowners can use its popular program.

Find out how much you qualify for.