The terms Home Equity Conversion Mortgage (HECM) and reverse mortgage are often used interchangeably. But while there is some overlap between them, they aren’t exactly the same. A HECM is a government-backed reverse mortgage. Not all reverse mortgages are HECMs, but all HECMs are reverse mortgages. Read on to find out what makes them different.
What Is a Home Equity Conversion Mortgage?
A home equity conversion mortgage, also called a HECM, is the only reverse mortgage insured by the federal government. These loans are available only through FHA-approved lenders. Because they are government-insured, HECMs afford borrowers protections that are not available in proprietary reverse mortgages offered by individual lenders.
HECMs are nonrecourse, which means the borrower will never owe more than the home is worth. If a borrower sells the house for less than what is owed, the lender cannot look to other assets to satisfy the debt. The Federal Housing Administration (FHA) will cover the difference. Whether HECMs or proprietary mortgages, all reverse mortgages are nonrecourse.
Reverse Mortgages in Brief
A reverse mortgage is a type of loan that allows homeowners, 62 years old or older, to convert a portion of their home equity into cash without needing to sell the property or make monthly mortgage payments. Instead, the lender pays the homeowner, and the loan is typically repaid when the homeowner sells the home, moves out, or passes away. It’s a way for homeowners to access the value of their home while still being able to live in it.
Additional Borrower Safeguards
To get a HECM, borrowers are required to undergo reverse mortgage counseling to ensure they fully understand the terms of the loan they are entering into. Additionally, to give a loan, the lender must conduct a full financial assessment of the borrower to determine if the borrower is financially able to uphold the terms and meet the loan’s obligations.
Other HUD-mandated safeguards include:
- HECM borrowers are only allowed to take a percentage of their total available funds in the first year of the loan.
- Non-borrowing spouses who meet certain qualifications are offered protection from eviction if the borrowing spouse dies.
HECM borrowers can take their loan payments as a lump sum, monthly payments, a line of credit, or a combination of the three. This flexibility is not available with all proprietary reverse mortgages.
HECM Eligibility Requirements
To qualify for a HECM, borrowers must meet several government-mandated eligibility requirements designed to protect both the borrower and the lender.
To qualify for a HECM, borrowers must meet loan eligibility requirements set by HUD, including:
- They are 62 years or older.
- The home is the borrower’s primary address.
- They own the home outright or have considerable equity in the house.
- They don’t have any delinquent federal debt.
- They can pay ongoing property taxes, homeowners insurance, and other property-related expenses like HOA fees.
In addition to the eligibility requirements above, HUD requires that all HECM borrowers meet with a third-party HUD counselor to review how a HECM works and ensure borrowers understand their obligations. During this session, counselors will discuss how borrowers will receive loan proceeds and what will trigger the loan to come due.
To be eligible, a property must be one of the following:
- A single-family home
- A 2-4 unit property in which the owner lives
- An FHA-approved condominium or manufactured home.
Mobile homes and properties with more than four units are considered commercial properties and are not eligible for a HECM.
How Much Can the Homeowner Borrow?
HUD sets guidelines for the amount of money a homeowner can borrow with HECM and sets a borrowing limit of $1,089,300 regardless of the home’s value.
The amount available to borrow is determined by multiple factors, including:
- The amount of equity available in the home.
- The age of the younger borrower or qualified non-borrowing spouse.
- The current interest rate.
- The lower of the home’s appraised value or the HUD limit.
Loan fees and costs will also impact the amount a borrower will receive via proceeds. The borrower can pay these fees with loan proceeds, which means they won’t have to come up with any cash at closing. However, this decision decreases the money available to the borrower.
Loan costs include the following:
- Mortgage insurance premiums (upfront and annual).
- Third-party fees like appraisals, title searches, surveys, inspections, etc.
- Origination fee capped at $6,000.
- A servicing fee paid to the lender for the tasks they undertake regarding your loan.
A Brief History of HECMS
HECMs have gone through an evolution over the last four decades. Relevant legislation and government oversight have made it easier to navigate these loans. Here is a brief history of key events in the loan’s trajectory.
- 1961. First reverse mortgage issued to a widow by a savings and loan lender in Portland, Maine.
- 1997. National Reverse Mortgage Lending Association (NRMLA) established in Washington, DC. This trade organization aims to report on reverse mortgage sales and conduct lobbying efforts.
- October 19, 1998. The first government-backed reverse mortgage was closed by James Nutter and Company in Kansas City, Missouri.
- 2005. HECM refinancing becomes available.
- 2009. HECM for purchase introduced.
- 2013. HUD introduces safeguards to make HECMs a safer product for consumers, including the restriction that a borrower can tap only a certain portion of their equity in the first year.
- 2015. Lenders are required to conduct a financial assessment to determine if borrowers can afford the mortgage requirements.
- 2021. HUD Added Protections for Non-Borrower Spouses. In, legislation allowed for non-borrowing spouses to stay in the home even after the last borrower moves to a nursing facility or passes away.
- 2022. HUD increased the borrowing limit for HECMs from $822,375 to $970,800.
- 2023. The limit increaseed to $1,089,300.
HECMs are available in all 50 states, the District of Columbia, and Puerto Rico. They can also be used to purchase a new home. By understanding the benefits of a HECM, you can know what to expect and how this financial tool can assist you in your retirement planning. As always, it’s wise to consult a financial advisor as you map out your future.
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.