FHA Home Equity Conversion Mortgages
HUD regulated, FHA insured reverse mortgages are one of the safest financial instruments available to seniors today. In its simplest terms, it allows homeowners age 62 or older to access a portion of their home equity in cash, monthly payments, or its most popular feature: A growing line of credit.
It is an FHA loan in every sense of the word, except that it allows the borrower the complete flexibility to decide when to repay the loan… as desired or not until the home is no longer the last borrower’s primary residence.
Since 2013, these products have been continually enhanced to protect the borrowers and the federal government alike. Protections have included:
- Required counseling with an independent third-party government approved counselor.
- Financial assessments to ensure the borrower can pay taxes, insurance and maintain the home.
- Significantly more protection for borrowing and non-borrowing spouses alike, and more.
The three types of Home Equity Conversion Mortgages are:
A reverse mortgage is a loan for borrowers 62 and over that converts home equity into cash.
The HECM reverse is the Department of Housing and Urban Development regulated, Federal Housing Authority insured reverse offered to seniors with, roughly, 50% or more equity in their home.
The HECM reverse is a mortgage like any other… You still own the home and, at the end of the term, you simply owe the loan balance. However, the unique attribute of reverse mortgages is that you alone decide how and when to pay back the loan.
What makes the HECM better than a typical mortgage?
- There are no personal guarantees on the loan to borrower or heirs. The home is the sole collateral for the indebtedness.
- The loan is non-callable and non-freezable, as long as you live in the home as your primary residence, maintain the home and keep current property taxes, insurance and homeowner association dues.
- It is very tightly regulated by HUD, and insured by the FHA.
- The mortgage can include a Line of Credit feature at no extra charge, with a market rate growth factor on the available balance at the same rate as applies to the outstanding balance. And, the LOC can grow to exceed the value of the home.
- At the end of the term, the borrower (or heirs) have the ability to sell the home, keep it via a refinance of the lower of the outstanding loan balance or 95% of the home’s value or, if the home is worth less than the loan balance, they may simply hand the keys to the lender without risk of ruined credit or worse.
HECM FOR PURCHASE
With all the benefits of the HECM reverse mortgage above, the HECM for Purchase (H4P) mortgage is a unique product that allows the borrower to purchase a home using the federally insured HECM loan.
Even though the H4P was introduced in 2008, it is still generally a little-known product available to 62 and over borrowers. This is unfortunate, as it is an extremely powerful mortgage option.
With an H4P, a lender can provide a loan amount that can be used to right-size and/or relocate to a new home. While a down payment of 50% or more may be required, typically a purchaser is investing the proceeds from the sale of their existing home.
What makes the H4P so valuable?
- Typically, it is much easier to qualify for the loan, with less emphasis on debt to income ratios or credit scores. Approvals can come as easy as passing a financial assessment and showing two years responsible bill paying.
- Requires typically less than 50% equity to close the loan, based on the age of the youngest borrower or eligible non-borrowing spouse. The older the borrower the less equity required.
- Save remaining money that would have otherwise been used to purchase the home for smarter, age appropriate allocations of cash.
Maintain maximum flexibility in cashflow, by deciding when, if and how much you want to pay on the loan. The choice is yours!
HECM TO HECM REFINANCE
If you are looking at an H2H refinance, you already know what a special financial tool the Home Equity Conversion Mortgage has become.
The H2H refinance is becoming more popular in this time of record low mortgage rates and record appreciation in home values because it allows the borrower to unlock even more of their available equity. And, the primary advantage of record low interest rates is the impact on the amount of equity you can add to your HECM Line of Credit… the lower the rates the greater the available balance.
Plus, if you or a loved one has an older Home Equity Conversion Mortgage with their typical high interest rates, it many times makes sense to refinance it to a much lower rate to reduce the annual interest accrual that is increasing the loan balance. We have seen over $15,000 a year in interest savings to borrowers in just this scenario by reducing their interest rates from over 6% to under 3% with a new HECM.