If you are age 62 or older you may want to participate in FHA’s Home Equity Conversion Mortgage (HECM), better known as the Reverse Mortgage, program.
To qualify for a Reverse Mortgage you must be a homeowner that has paid off your mortgage or paid it down by a considerable amount and are currently living in the home.
With this program you can choose the way you want to withdraw your funds. You can choose to receive them in a fixed monthly amount or a line of credit or a combination of both.
How the FHA Reverse Mortgage Program Works
There are many things for you to consider before deciding a Reverse Mortgage is the right course of action for you. To help in this process the FHA requires you to meet with a Reserve Mortgage counselor of your choosing.
This counselor will discuss Reverse Mortgage financial implications, eligibility requirements and alternatives to a Reverse Mortgage. They will also discuss how to repaying this loan and what happens when the Reverse Mortgage becomes due and payable.
Upon the completion of this counseling session you should be able to make an informed decision regarding whether a Reverse Mortgage will meet your specific needs. You can search online for a HECM or Reverse Mortgage counselor or call toll-free (800) 569-4287 to locate one.
You must also meet certain borrower and property eligibility requirements. You can use the information below or a reverse mortgage calculator, readily found online, to make sure you qualify.
If you meet the eligibility requirements you can complete a reverse mortgage application through any FHA-approved lender. Almost any institution that offers mortgages will be FHA approved. You can do an online search for a FHA approved lender or ask the HECM counselor to provide you with a list. After you choose a lender they will discuss all the requirements of the Reverse Mortgage program, the loan approval process, and the repayment terms with you. If they will not do this then you picked the wrong lender. Do more research and then choose another mortgage source!
Be at least 62 years of age
Own the property free and clear or have a considerable amount of equity
Live on the property and it must be your principal residence
You cant be be delinquent on any federal debt
Attend a consumer information session presented by a HUD approved HECM or Reverse Mortgage counselor
A single family home or
A 2 to 4 unit complex and one unit must be occupied by the borrower or
A HUD approved condominium community or
A manufactured or mobile home that meets all FHA requirements
Income, assets, monthly living expenses, credit history, payments of real estate taxes and insurance premiums may be verified.
You can select from five payment plans:
Tenure – equal monthly payments to you as long as one borrower lives and continues to occupy the property as their principal residence.
Term – equal monthly payments to you for a fixed period of months.
Line of Credit unscheduled payments or installments to you, at times and in an amount of your choosing, until the line of credit is exhausted.
Modified Tenure – combination of line of credit and scheduled monthly payments to you for as long as one borrower lives and continues to occupy the property as their principal residence.
Modified Term – combination of line of credit plus monthly payments to you for a fixed period of months selected by you.
You can change your payment plan at any time for $20.00
What Your Mortgage Amount is Based On
The age of the youngest borrower
The current interest rate
The appraised value or the FHA Reverse Mortgage limit of $625,500 or the sales price whichever is less.
As a general rule the more valuable your home is, the older you are, and the lower the interest rate is, the more you can borrow. If there is more than one borrower, the age of the youngest borrower is used to determine the amount you can borrow.
For an estimate of your Reverse Mortgage cash benefits, go to the HECM Home Page,http://portal.hud.gov/hudportal/HUD/program_offices/housing/sfh/hecm/hecmhome, and select the online calculator.
Reverse Mortgage Costs
You can pay most of the costs of a Reverse Mortgage by financing them. This means that you can have them paid from the proceeds of the loan and not with cash from out of your pocket. On the other hand, financing the costs reduces the net loan amount available to you.
A Reverse Mortgage can incur several fees and charges including mortgage insurance premiums (initial and annual), any third party charges, origination fees, interest and servicing fees. The lender will discuss these fees and charges with you prior to closing your loan.
You will be charged an initial mortgage insurance premium at closing. The premium will be either 2% for the Standard insurance program or the 1% for the Saver insurance program. These insurance programs are based on the appraised value of your home, the FHA HECM mortgage limit of $625,500 or the sales price whichever is lower. Over the life of the loan, you will also be charged an annual mortgage insurance premium that equals 1.25% of your mortgage balance.
Mortgage Insurance Premium
One of the costs you will incur with a FHA reverse mortgage is a mortgage insurance premium. This pays for the mortgage insurance which guarantees that you will receive expected loan advances by guaranteeing the reverse mortgage with the lender. You can finance the mortgage insurance premium as part of your loan but it will reduced the net amount of cash that you can receive.
Third Party Charges
Closing costs incurred from third parties can include the appraisal fee, costs of the title search, insurance premiums, charges for any needed surveys, inspections charges, recording fees, mortgage taxes and the cost of an credit checks. Other fees may be incurred as deemed appropriate.
Another fee you will pay is an origination fee. This compensates the lender for processing your Reverse Mortgage. A lender can charge a Reverse Mortgage origination fee of up to $2,500 if your home is valued at less than $125,000. If your home is valued at more than $125,000 the lender can charge 2% of the first $200,000 of your home’s value plus 1% of the amount over $200,000. Reverse Mortgage origination fees are capped at $6,000. These fees are usually negotiable between you and the lender.
You can choose a fixed rate or an adjustable interest rate loan. If you choose an adjustable interest rate, you can choose to have the interest rate adjust monthly or annually.
Lenders may not move annually adjusted Reverse Mortgage by more than 2 percentage points per year and not by more than 5 total percentage points over the life of the loan. FHA does not require interest rate caps on monthly adjusted Reverse Mortgage.
Lenders or their agents provide servicing throughout the life of the Reverse Mortgage. Servicing the loan includes sending you account statements, disbursing loan proceeds and making certain that you keep up with loan requirements such as paying real estate taxes and hazard insurance premium. Lenders may charge a monthly servicing fee of no more than $30.00 if the loan has an annually adjusting interest rate and $35.00 if the interest rate adjusts monthly. At loan origination, the lender sets aside the servicing fee and deducts the fee from your available funds. Each month your loan is in effect the monthly servicing fee is added to your loan balance.
FHA rules are subject to change. These were the guidelines at the time this article was written February 5, 2012. Please check with the applicable agent or agency to ensure that they are still current before making any buying decisions.