July 19, 2011
One frequently asked question about FHA Home Equity Conversion Mortgages has to do with the interest rate on the loan. Can the borrower get an interest rate lock-in on an FHA HECM?
On HECM loans, the borrower’s principal loan limit could be affected if interest rates change between the time the loan is applied for and the time the loan closes. Do FHA rules allow a lender to fix the interest rate on these mortgages?
According to the FHA official site, HECM loans are permitted to feature an interest rate lock-in at the time the loan application is submitted. “FHA will allow for mortgage lenders to set the expected interest rate for HECMs at the time the loan application is signed by the borrower rather than on the date of closing. Mortgagee Letter 06-22 revises the instructions found in the section ‘Requirements for Closing’ contained in Chapter 6, page 6-7 of HUD Handbook 4235.1 REV 1.”
This, according to the FHA, is designed to both protect the borrower and end some of the confusion over the rates on HECM loans. Even at the best of times, if a qualified borrower applied for a HECM loan without a locked-in rate, there’s a chance the rates could increase. In a more unpredictable market, that risk only goes up.
“This interest rate ‘lock-in’ provision”, the FHA states, shields the loan applicant from “unexpected reductions to a HECM borrower’s principal limit when market interest rates increase during the interim between loan application and loan closing.”
But the interest rate is not locked indefinitely. Borrowers should understand that lenders may only lock the interest rate on an FHA HECM for 120 days. The first day of the 120-day interest rate lock is for all applicants, “the first day following the date of case number assignment through FHA Connection.”
FHA HECM loans are for qualified borrowers aged 62 and older who live in the property secured by the FHA loan as their primary residence.
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.
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