FHA Home Equity Conversion Mortgage Program For Senior Homeowners

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The Home Equity Conversion Mortgage program enables older homeowners to withdraw some of the equity in their home in the form of monthly payments for life or a fixed term, or in a lump sum, or through a line of credit.


The Home Equity Conversion Mortgage Program (HECM) can enable an older home owning family to stay in their home while using some of its built up equity. The program allows such a household to get an insured reverse mortgage-a mortgage that converts equity into income. Because older persons can be vulnerable to fraudulent practices, before applying for a reverse mortgage the program requires that persons receive free reverse mortgage housing counseling from a HUD-approved reverse mortgage counseling agency. To protect lenders against loss if amounts withdrawn exceed equity when the property is sold, FHA insures HECM loans.

HECM can be used by homeowners who are 62 years of age and older. The total income that an owner can receive through HECM is the maximum claim amount, which is calculated with a formula including the age of the owner(s), the value of the home, and the interest rate. For example, on the basis of a loan at recent interest rates, a 65-year-old could borrow up to 26 percent of the home's value, a 75-year-old could borrow up to 39 percent, and an 85-year-old could borrow up to 56 percent.

Borrowers may choose one of five payment options: (1) term, which gives the borrower monthly payments for a fixed period selected by the borrower; (2) tenure, which gives the borrower a monthly payment from the lender for as long as the borrower lives and continues to occupy the home as a principal residence; (3) modified tenure, which combines the tenure option with a line of credit; (4) line of credit, which allows the borrower to make withdrawals up to a maximum amount, at times and in amounts of the borrower's choosing; and (5) modified term, which combines the term option with a line of credit.

The borrower remains the owner of the home and may move at any time and sell it, keeping the sales proceeds that exceed the mortgage balance. Even if the mortgage balance grows to exceed the value of the property, a borrower can't be forced to sell the home to pay off the mortgage. A HECM loan need not be repaid until the borrower sells, moves, or dies. When the loan must be paid, the borrower (or the heirs) will owe no more than the value of the property if the loan exceeds the value of the property. FHA insurance will cover any balance due the lender.

Two mortgage insurance premiums are collected to pay for HECM: an up front premium (2 percent of the home's value), which can be financed by the lender, and a monthly premium (which equals 0.5 percent per year of the mortgage balance). The lender's loan origination charge can vary, but only up to $1,800 in such charges may be financed by HECM. Borrowers may be charged appraisal and inspection fees set by HUD; these charges can also be financed.

As part of the HECM program, HUD has provided for free reverse mortgage counseling (with training for the counselors) for persons considering using such an instrument, and a toll-free information line (800) CALL-FHA (800-225-5342).

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