May 19, 2016
In a recent blog post we wrote about the steps the FHA and HUD are taking to further improve the FHA Home Equity Conversion Mortgage (HECM) loan program. The FHA HECM, also known as a reverse mortgage or FHA reverse mortgage, is a different type of home loan than a typical “forward mortgage” for a new purchase or refinance on a previous mortgage.
The FHA reverse mortgage or HECM is for qualified borrowers age 62 or older who either own their property outright (with the mortgage paid off in full and documentation of that paid-in-full status) or are very close to paying off the current loan.
According to the FHA official site, HECM loans are a “…special type of home loan that lets you convert a portion of the equity in your home into cash. The equity that you built up over years of making mortgage payments can be paid to you.”
The official site adds that the payment terms and conditions are quite different for HECM transactions than for traditional forward mortgages; “…unlike a traditional home equity loan or second mortgage, HECM borrowers do not have to repay the HECM loan until the borrowers no longer use the home as their principal residence or fail to meet the obligations of the mortgage.”
“You can also use a HECM to purchase a primary residence if you are able to use cash on hand to pay the difference between the HECM proceeds and the sales price plus closing costs for the property you are purchasing.”
There are some very specific requirements for FHA reverse mortgages aside from the usual financial qualifications with FICO scores and credit history. According to FHA.gov, borrowers are required to prove they can afford to continue paying property taxes and insurance, and there is also an occupancy requirement. Borrowers who do not meet their property tax obligations or who fail to use the home as their primary residence could wind up having their HECM loan declared due and payable in full.
What kinds of property is eligible for an FHA HECM loan? Any of the following as described on the FHA official site:
“To be eligible for the FHA HECM, your home must be a single family home or a 2-4 unit home with one unit occupied by the borrower. HUD-approved condominiums and manufactured homes that meet FHA requirements are also eligible.” An appraisal is required to establish the value of the property and to determine how much a borrower is eligible to receive under the HECM loan.
There are several options for payouts to the borrower once the FHA reverse mortgage loan is approved. We will cover these details in a future blog post.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
Browse by Date: