Everything You Need to Know About HECMS

A home equity conversion mortgage (HECM) is the most common reverse mortgage loan. Unlike a conventional mortgage, a reverse mortgage allows homeowners to not have monthly mortgage payments and could receive monthly payments from the lender. Here is everything you need to know about HECMs:

What Is a HECM?

A HECM is a government-insured mortgage allowing homeowners 62 years and older to borrow against the equity in their homes while continuing to live in the home and forgoing required monthly mortgage payments. A HECM is the only reverse mortgage insured by the Federal Housing Administration (FHA), which is a part of the US Department of Housing and Urban Development “(HUD).” In a HECM, the borrower will receive loan proceeds as a lump sum, monthly payment, line of credit, or a combination of these options. The loan balance is due when the last borrower moves out of the home, does not comply with the loan terms, or passes away.

What Do You Pay with A Reverse Mortgage?

Reverse mortgage borrowers stay in their homes without making any required mortgage payments. However, in order to enjoy those privileges, they must stay in good standing with their loans. Homeowners who don’t need their loan obligations will need to repay their loan. Obligations include:

Paying property taxes, homeowner’s insurance, and other home-related fees
Living in the home as their principal residence
Maintaining the home

HECMs are nonrecourse, which means the borrower will never owe more than the home is worth. If the last borrower or heir sells the house for less than what is owed subject to the lender’s approval, the lender cannot look to other assets to satisfy the debt. The Federal Housing Administration (FHA) will cover the difference.

Eligibility Requirements for a HECM

Borrowers and their properties must satisfy the following requirements to be eligible for a HECM.

Borrower requirements include:

Age. Borrowers must be 62 years or older.
Primary Residence. Your home is your principal residence.
Ownership. You must own your home or paid down a considerable amount.
Financial Obligations. You must be able to pay property taxes, homeowner’s insurance, and maintain your property.
No Federal Debt. You cannot be delinquent on any federal debt.
Counseling Requirement. All reverse mortgage borrowers must undergo counseling with a HUD-approved HECM counselor before entering into the loan.

Only single-family homes are eligible for HECMs. The definition of a single-family home can cover a variety of structure types. According to the Federal Housing Administration (FHA), a single-family home is a stand-alone unit or one attached to a building. This definition includes:

Manufactured homes and townhomes affixed to a foundation.
Duplexes, triplexes, and fourplexes if the borrower lives in one of the units.
FHA-approved condominiums. By checking the Housing and Urban Development (HUD) website, borrowers can determine if they have an approved condo.

HUD considers buildings with more than five units commercial properties, which are not eligible for a reverse mortgage.

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Fees and Costs of a HECM

In any home loan, conventional or reverse, there are costs and fees associated with the transaction. The HECM borrower must pay the following fees, but these costs can be rolled into the loan.

Here are the fees associated with a reverse mortgage:

Third-party Fees. Borrowers must pay for appraisals, title searches, surveys, inspections, etc.
Mortgage Insurance Premium (MIP). All FHA-insured loans require the HECM borrower to get mortgage insurance, whether a traditional or reverse loan.
Origination Fee. Borrowers should expect to pay $2,500 or 2% of the first $200,000 of the home’s appraised value, whichever amount is greater, plus 1% of the amount the loan exceeds $200,000. The cap for this fee is $6,000, and you can cover it with loan proceeds.
Servicing Fee. The loan servicer collects a fee for the tasks undertaken on your loan.
Interest. Since there isn’t a monthly mortgage payment, interest accrues on the loan over its lifetime and will come due with the loan.

Amount Available to Borrow

HUD limits the total amount available to any HECM borrower regardless of their equity. The 2024 limit is $1,149,825, regardless of the home’s value.
In addition to that maximum amount, lenders calculate the amount available to an individual to borrow by considering several factors including:

Age of the youngest borrower or qualified non-borrowing spouse.
The current interest rate.
The lower of the home’s appraised value or the HECM FHA limit.

Unique Features of a HECM

Since a HECM works differently than a conventional loan, knowing what features set it apart from most mortgages is helpful.

Multiple Ways to Receive Proceeds

A HECM offers borrowers different ways to receive their money. The loan also will enable borrowers to receive monthly proceeds in several ways:

Fixed- Rate Lump Sum.
Adjustable-Rate Monthly Payout.
Line of Credit.

When the borrower takes the reverse mortgage, they may elect to take equity out as cash. They may also keep it available for the future as a line of credit. Or they may choose a combination of the two. The amount available through the line of credit depends on the amount of available equity and how much the borrower chooses to take as cash payouts. Remember, a HECM line of credit can grow over time. As the principal limit grows over time, as long as the loan has not matured or the borrower has not defaulted, the homeowner’s line of credit borrowing power increases. All money borrowed from the line of credit accrues on the loan balance. Because the U.S. Department of Housing and Urban Development (HUD) guarantees HECMs, lenders cannot freeze a HECM line of credit if the home drops in value.

When borrowers receive HECM proceeds, they can use the funds for almost any use at their discretion. They can use the funds for a vacation, pay off higher-interest credit card debt, or help a grandchild with their college tuition. The funds that a borrower receives aren’t considered income at all. Although the money you receive may be considered “income,” you receive it through a loan, so the Internal Revenue Service doesn’t consider these proceeds taxable. Another tax implication may arise if the borrower decides to sell the home, and selling an asset like real estate may require payment of a capital gains tax.

A HECM Is a Non-recourse Loan

One of the key features of a HECM is that it is a non-recourse loan. This means the borrower or borrower’s heirs, at the time of repayment, are not liable for any shortfall if the loan amount exceeds the home’s value. The lender cannot pursue the borrower or borrower’s other assets to make up the difference. Instead, if the home sale proceeds won’t cover the difference, the lender will look to the FHA insurance to cover the shortfall. This feature offers the borrower and borrower’s heirs significant peace of mind knowing they will never have to come up with additional funds for the loan repayment.

Mortgage Insurance Requirement

All FHA mortgage borrowers are required to pay mortgage insurance. This insurance allows the FHA to guarantee the loans to lenders and extend non-recourse status to borrowers. Typically, borrowers pay one mortgage insurance premium at closing and another annually. Mortgage insurance ensures that if a HECM borrower or heirs are underwater on a mortgage, they won’t have to provide additional funds to compensate for the shortfall.

Life Expectancy Set Aside (LESA) Helps the Borrower

During the loan application process, the borrower must undergo a financial assessment. Should the lender determine the borrower cannot meet the financial obligations, they may recommend a life expectancy set aside (LESA). A LESA works similarly to an escrow account in a conventional mortgage. The lender sets aside an amount in a separate account so that taxes and property insurance can be paid in case the borrower has trouble making this payment in the future. This amount is pulled from the borrower’s loan proceeds. The borrower is responsible for paying taxes and property insurance after the funds in the LESA are exhausted.

How Much Money Can You Get from a HECM?

Several factors determine how much money you can borrow through a reverse mortgage. Those include the age of the youngest borrower or eligible non-borrowing spouse, current interest rate, and lesser of the appraised value of the HECM FHA mortgage limit. A reverse mortgage calculator will help you estimate how much money you can borrow. The borrower should supply their age, home value, and current mortgage balance in the calculator.

Money can be distributed in a variety of ways. You can get proceeds via a lump sum, monthly payouts, a line of credit, or a combination of these options. It is worth mentioning that all HECMs are subject to the 60% utilization rule. This limits the amount any reverse mortgage borrower can take in the first year to 60% of the principal limit, less any amounts needed to fulfill the mandatory obligations of the loan. The remainder of the available principal will be available to the borrower in the 13th month of the loan and will come from an established line of credit.

Standard Management of Your HECM

Standard management of a HECM includes the following:

Home occupancy certificate. Every year the servicer will send you a home occupancy certificate verifying that you are in the home. You have to send the certificate back within 30 days of receiving it.
Maintenance of home. Borrowers are required to maintain the home in good and habitable condition. If the borrowers fail to address important repairs, the lender may find their loan in default.
Payment of home insurance and property taxes. All borrowers must pay home insurance and property taxes if they want to remain eligible for their reverse mortgage.

How Changing Life Circumstances Impact a HECM

Various life circumstances may impact your HECM. Some of those circumstances include:

You are selling your home. Selling your home with a HECM works like selling your home with a traditional mortgage. When you sell the home, you take the proceeds and apply it to the balance on your reverse mortgage. Whatever money remains is yours to keep.
Refinance. If you want to capitalize on better interest rates or your property value has increased, refinancing a HECM is a good option. Refinancing a HECM means the borrower must meet the eligibility requirements of a HECM. Borrowers may be required to sign an anti-churning disclosure to prevent them from repeatedly engaging in refinancing the loan.
Marriage. You cannot add your new spouse to an existing HECM. However, to be included on the loan, this spouse, if eligible, can be included on a new HECM or a refinance. If the new spouse opts not to seek a new HECM or refinance, they will be considered a non-borrowing spouse. Special guidelines allow the non-borrowing spouse to stay in the home if the borrower moves to an assisted living facility or passes away.
How a Divorce Impacts an Existing HECM. If the borrower decides to divorce the non-borrowing spouse, the non-borrowing spouse will likely have to move out of the home. Alternatively, suppose the non-borrowing spouse wants to stay in the home and meets eligibility requirements. In that case, they can separately apply for a reverse mortgage as a part of the divorce settlement.
How A Borrower Passing Impacts an Existing HECM. The loan becomes due if the last borrower on a reverse mortgage passes away.

What Happens at the End of a HECM?

Generally, a HECM comes due when the borrower sells the house or violates the terms. The other way a HECM comes due is when the last borrower dies. When this happens, heirs are faced with choices on what to do.

The heirs can sell the home. If the heirs want to repay the loan, they can use the proceeds from the home’s sale and apply this to the outstanding balance.
The heirs can keep the home. The heirs can keep the home if they pay the mortgage balance or 95% of the property’s appraised value, whichever is less. Heirs can refinance the loan if they choose.
The heirs can sign over the title and complete a deed instead of foreclosure. The heirs can give the property to the lender by signing over the home’s title to the lender accompanied by a deed. By doing so, the debt is satisfied, preventing foreclosure of the home.
Heirs can do nothing. The lender will foreclose on the home if the heir chooses to do nothing with the loan.

Seniority is published by Finance of America Reverse LLC. The views expressed in this publication are those of the author alone and do not necessarily reflect the views and opinions of Finance of America Companies. This article is intended for general informational and educational purposes only and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.