A Home Equity Conversion Mortgage (HECM), commonly known as a reverse mortgage, is a Federal Housing Administration (FHA) insured loan1. A HECM enables seniors to access a portion of their home’s equity without having to make monthly mortgage payments as long as they live in the home as their primary residence, continue to pay required property taxes, homeowners insurance and maintain the home according to FHA requirements.
To be eligible for a HECM reverse mortgage loan, the youngest borrower on title must be at least 62 or older and must meet financial eligibility criteria as established by HUD. The home must be owned free and clear or all existing liens and mandatory obligations would need to be satisfied through the reverse mortgage proceeds.
There are several ways to receive the proceeds from a reverse mortgage loan:
- Lump sum – a lump sum of cash at closing (only available for fixed-rate loans)
- Tenure – equal monthly payments as long as the homeowner lives in the home
- Term – equal monthly payments for a fixed period of months
- Line of Credit – draw any amount at any time until the line of credit is exhausted
- Any combination of those listed above
Borrowers may access the greater of 60% of the principal limit amount or all mandatory obligations, as defined by the reverse mortgage requirements, plus an additional 10% during the first 12 months after loan closing for all adjustable rate loans. For fixed rate loans, the additional 10% may only be taken at loan closing. The combined total of mandatory obligations plus 10% cannot exceed the principal limit amount established at loan closing. The principal limit is the amount of funds available to the borrower through a reverse mortgage loan.