Q: Maybe you can settle a dispute between my brother and I: We are trying to help our aunt refinance her home. Our uncle recently passed away, and now our aunt is really worried about keeping her home. My brother says she can get an FHA reverse mortgage. I thought FHA loans were for people with little cash for a down payment, and not a senior with lots of home equity. What's the deal?
A: FHA does have a reverse mortgage loan program, which is called the Home Equity Conversion Mortgage (HECM). As with "regular" FHA loans, the government insures lenders against losses on HECM loans issued by FHA approved lenders. In short, a HECM loan allows homeowners of age 62 and above to take out a mortgage which permits them to withdraw a lump sum, periodic payments, or a combination of both up to the amount of the HECM loan less costs and interest.
This can work well for seniors who have a lot of equity in their homes. If your aunt has an existing home loan, a portion of HECM loan proceeds would be used to pay off her current mortgage, and the net balance would be available for withdrawal.
According to the FHA, a HECM loan requires borrowers to pay closing costs, interest, a servicing fee, and FHA mortgage insurance premiums. Reverse mortgage borrowers are also responsible for paying property taxes, keeping hazard insurance in force and maintaining their homes in good condition.
We suggest that your aunt discuss her overall financial circumstances and plans with her financial advisor. While a HECM loan eliminates mortgage payments and can provide senior homeowners with non-taxable cash income, these loans reduce home equity, which could interfere with your aunt's intentions regarding her estate and heirs.
Homeowners considering HECM loans or other reverse mortgage loans should know that these mortgages have strict requirements concerning owner occupancy. HECM loans typically become due and payable when the homeowner no longer occupies the property as a principle residence
We recommend that your aunt request mortgage quotes and discuss HECM mortgages with FHA lenders to determine if this type of mortgage best meets her needs.