The most popular type of reverse mortgage is the home equity conversion mortgage (HECM). One of the reasons they are a popular choice for borrowers is that they are backed by the U.S. Department of Housing and Urban Development (HUD). HUD oversees several aspects of HECMs to help ensure they are safe for consumers. HUD also oversees the Federal Housing Administration (FHA), which insures all HECMs.
When Did HUD Start Regulating HECMs?
In 1988, Congress passed Section 255 of the National Housing Act, giving HUD authority over HECMs. In 2013, they added the Reverse Mortgage Stabilization Act as an amendment to the National Housing Act. The purpose of this amendment was to provide HUD with additional authority to govern HECMs without having to move through the traditional rule-making process.
HUD now has permission to respond to market changes to make HECMs more stable for consumers. HUD monitors and assesses all HECMs to ensure they offer a safe product for older adults.
HECM Eligibility Requirements Set by HUD
HUD mandates that all HECM borrowers must meet the following eligibility requirements to apply for a HECM loan:
- Age requirement. Borrowers are required to be 62 years or older.
- Primary residence. The home must be the borrower’s primary residence.
- No federal liens. Before taking a HECM loan, all federal liens must be paid. Many of these can be paid with loan proceeds.
During the life of the loan, the borrower must fulfill the following conditions to say in good standing with their loan.
- Financial obligations. Although HECM borrowers do not have required monthly mortgage payments, they are responsible for other home-related costs, including property taxes, home association dues, and mortgage insurance.
- Home upkeep. The borrower must keep and maintain the condition of the home.
As of 2015, HUD requires all borrowers to undergo a detailed financial assessment during the application period of a HECM. The financial assessment includes a review of the borrower’s income, expenses, and credit history. Lenders must also determine whether borrowers have the financial resources to maintain the home and pay property taxes and other home-related costs. The financial assessment ensures that the borrower can maintain the obligations of a HECM.
Life Expectancy Set Aside (LESA) Requirement
If the lender determines that the borrower cannot meet the assessment’s financial requirements, they can set up a Life Expectancy Set Aside (LESA) as part of the loan. With a LESA, part of the borrower’s available principal gets put into a fund covering their taxes and insurance.
All HECM applicants must undergo mandatory counseling according to HUD regulations. The counselor is a third-party HUD-approved individual who will talk with all HECM borrowers. The counseling aims to educate borrowers on the benefits of a reverse mortgage loan and the ongoing obligations and risks associated with a HECM. Borrowers can receive counseling over the phone or in person. The borrower must present a certificate of counseling completion before applying for the loan.
Total Annual Loan Cost Disclosure (TALC)
HUD requires a lender to give the borrower a total annual loan cost disclosure (TALC), a statement breaking down the costs associated with the loan, interest, fees, and other charges. This alerts the borrowers of yearly costs and estimates how much they will have paid by the end of the loan.
Right of Rescission
By HUD’s regulations, all lenders must give borrowers the right to change their mind about the loan or rescind it. All borrowers of HECMs have the right to cancel the loan up to three business days after closing. This right does not apply to HECMs for purchase.
Loan Proceed Limits
Based on HUD regulations, a lender determines the maximum lending limit based on the youngest age of the borrower, the current interest rate, and the home’s value. Lenders will enter these factors into a formula to determine the borrower’s principal limit. Also, HUD sets a maximum claim amount each year based on the FHA national loan limit. In 2023, the maximum claim amount is $1,089,300.
Eligible Non-Borrowing Spouse Protections
In 2014 and 2021, HUD issued mortgagee letters to expand the guidelines on how the HECM affected eligible non-borrowing spouses after the last borrower on the loan passes away. Non-borrowing spouses, or those not on the mortgage, can stay in the home if the HECM isn’t in default for any reason and they meet the eligibility requirements. According to HUD guidelines, non-borrowing spouses deemed eligible for the protections are not required to provide documents showing that they have a marketable title or legal title to remain in the home. This expansion allows grieving spouses to remain in the home without the threat of eviction.
Rules for When a HECM Balance Comes Due
When the last borrower on the mortgage moves, sells the home or passes away, the HECM loan comes due and payable. HUD provides heirs with three options:
- Sell the property and use the proceeds to pay off the loan.
- Pay the loan with other assets and keep the home.
- Obtain a deed-in-lieu of foreclosure. The heirs will transfer ownership of the house to the lender.
Even if the loan balance exceeds the home’s current market value, the lender, under HUD regulations, will not be allowed to pursue the heirs for the shortfall between the loan amount and the home’s sale price.
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.