The Department of Housing and Urban Development, or HUD, offers the Home Equity Conversion Mortgage (HECM) through the FHA program. Pronounced HECK-um, this loan is often referred to as a reverse mortgage and is somewhat counterintuitive. A traditional mortgage is what is a “forward” mortgage which means the loan balance gets lower as each payment is made to the lender. With a reverse mortgage, there are no monthly payments and the loan balance actually gets larger over time, not smaller. The HECM loan converts homeowner equity into cash for those who qualify without the need for a standard home equity loan or cash-out refinance.
Find Out if You Qualify
The HECM is for homeowners occupying the property who are at least 62 years of age and is based upon a percentage of the current equity in the property. There are no credit score minimums nor are there income minimums. Lenders are required however to verify borrowers have the ability to maintain the property in good condition, keep the property insured and have the resources to pay property taxes when due. Borrowers are also required to complete a certified consumer education course that explains the mortgage process, payments and the responsibilities associated with the loan.
Interest rates on mortgage conversion loans can vary based upon current market conditions and there are rates for both fixed and variable loans. Loan amounts can be issued in a single payment, issued as a line of credit or a combination of either. Over time, interest is applied to the HECM loan and hence the loan balance actually grows but there are no required payments to be made as long or until the homeowners no longer occupy the property. At this stage, the home is sold and the mortgage is retired. There are closing costs associated with a HECM but can be rolled into the final loan amount and can be used finance a single family home, a 2-4 unit property as long as the borrower occupies one of the units as well as FHA-approved condominium projects. If there is an existing balance when applying for a HECM loan the existing mortgage must be paid off first as there can be no other mortgage on the property when the HECM is placed.
HECM vs. Cash-Out Refinancing
If you compare a reverse mortgage loan with a standard cash out refinance or a home equity line of credit, the main difference is there are no payments to be made with the HECM loan while a cash-out or HELOC does have to be paid back each month which is why income verification isn’t a priority.
If someone is in the process of refinancing an existing mortgage then pulling out cash might be an option but if the homeowners meet the standard qualifications of the HECM program and simply want to convert equity into cash with no monthly payments needed, the loan needs further exploration.
Questions on any of this? Reach out to me or use my free Reverse Mortgage Analysis to learn more!