Homemade Money: A Consumer's Guide to Reverse Mortgages

By: Source: AARP.org Date Posted: 2003-06-19 12:38:00-04:00

Session 6 - Federally Insured Reverse Mortgages: HECMs

Also known as Home Equity Conversion Mortgages (HECMs), federally insured reverse mortgages are widely available throughout the United States to homeowners aged 62 and over, and can be used for any purpose.

While HECMs are generally more expensive than the single-purpose loans discussed in session 5, they are almost always less expensive than proprietary loans. HECMs offer the widest array of loan-advance choices, and they generally provide greater total cash advances than either of the other two major types of reverse mortgages.

Government backed

HECMs are backed by the Federal Housing Administration and are offered by banks, mortgage companies and other private-sector lenders. They are federally insured, which means the U.S. government guarantees that HECM borrowers will get all the cash advances promised to them. The FHA also tells HECM lenders how much cash they can lend you, based on your age and your home's value. Finally, federal backing limits your loan costs, making HECM loans the lowest-cost multipurpose reverse mortgages available.

Are you eligible?

To be eligible for an HECM loan, you must meet the following criteria:

  1. You, and any other owners of your home, must be aged 62 or over.
  2. At least one owner must use your home as his or her principal residence.
  3. Your home must be a single-family residence in a one- to four-unit dwelling, or part of a HUD-approved condominium or planned-unit development. While some manufactured housing is eligible, mobile homes and cooperatives are not.
  4. Your home must meet HUD ' s minimum property standards, but you can use the HECM to pay for any required repairs.
  5. You must discuss the HECM program with a HUD-approved counseling agency. (See Additional resources below for contact information.)

Paying down existing debt

While it is not an eligibility requirement, you need to know how the HECM program deals with any debt you may still owe on your home. In order to take out a reverse mortgage, you must pay off any money you now owe on an existing home mortgage. The good news: you can do so with a lump-sum advance from a HECM loan. For example, if you still owe $20,000 on a mortgage or home equity loan and do not pay it off before closing a HECM, you would have to qualify for at least $20,000 in a lump-sum advance from a reverse mortgage. You could then use the lump sum to pay off your existing debt at closing.

HECM benefits

The amount of cash you get from a HECM reverse mortgage depends on your age, current interest rates and your home's value. In general, the older you are, the more cash you can get. But if your home has more than one owner, the age of the youngest is the one that counts. The lower interest rates are when your loan closes, the greater your loan amount will be.

In general, the greater your home's appraised value, the more money you can get. But the value is subject to 203-b limits (so called because they are defined in section 203-b of the National Housing Act). These vary by county, based on the median home value. In 2002, these limits ranged from $144,336 in most non-metro areas to $261,609 in many urban areas. HUD is now looking into the feasibility of establishing a single national limit.

If your home is worth more than the 203-b limit for your county, you are still eligible for a HECM loan. But the amount of money you can get is based on your county limit, not on your home's actual value. For example, if your home is valued at $150,000 and your county limit is $125,000, then your cash advances are the same as they would be if your home were valued at $125,000.
The amount of money you can get from a HECM loan also depends on how you choose to have it paid to you. In the next session, we'll take a look at three types of cash advances: lump sums, creditlines and monthly advances.

Glossary

203-b limits:
In the federally insured HECM program, the dollar amount for each county that limits how much of a home's value can be used to determine a borrower's loan advances; subject to increase at least annually; defined in section 203-b of the National Housing Act. Also called "equity limit" or "loan limit."
Current interest rate
The interest rate currently being charged on a HECM loan, which equals the one-year rate for US Treasury securities, plus a margin.

Additional resources

Locating HUD-approved counseling services

AARP Foundation
Rmcounsel@aarp.org (e-mail address)
Provides HUD-approved HECM counseling via telephone. If you are seriously considering applying for an HECM after completing this seminar, send an e-mail message to the address above. Include your name, state, telephone number and the best weekday time for a counselor to call you. Note: the counseling generally takes at least one hour and requires two or more calls.

Office of Housing and Urban Development
Visit this web site or call 1-888-466-3487 to find the HUD-approved counseling agency nearest you.

Determining maximum mortgage limits for your county

Office of Housing and Urban Development
Lists the current maximum mortgage limit for every county in the United States.

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