To qualify for a Home Equity Conversion Mortgage the home must be the retiree’s primary residence. All the owners of the home must reside in the property and be over 62 years of age. The house must also meet certain standards for condition and safety.
Home Equity Conversion Mortgages (HECM’s) are insured with the Federal Housing Administration (FHA). They are not an entitlement program nor do they contribute to the national deficit. FHA is an income-producing program of the government.
The insurance protects the borrower and his/her heirs from owing more than the home will sell for. It also protects the credit line. Unlike most equity lines, the lender can’t cancel out the credit line even if home values fall or the borrower has credit problems as long as it remains the primary residence, and home insurance and property taxes are paid). It does this be insuring that if the lender ever falls to extend available funds, all responsibilities and liabilities fall to FHA.
The loan comes due when the home is sold, the borrower changes residence, the last borrower dies or the last borrower is in a continuing care facility for 12 consecutive months with no prospect of returning home.
The homeowner continues to own the home. When the heirs inherit, they have six months, with the possibility of two 90-day extensions, to sell the house or they can pay the back the loans with their own funds. There are no payments to the bank required of the heirs during the time they are trying to sell. However, they are responsible for maintenance, paying the property taxes and keeping the home adequately insured.
What will be owed is the money borrowed. This includes the money that has been received and the interest on that money, from the time the loan was taken out until it is paid off. There are no prepayment penalties, so the loan can be paid off at any time, in whole or part. The homeowner can make payments, but doesn’t have to.
HECM’s are available with either a fixed or variable rate. For a fixed rate, all available funds must be received at the closing. Credit lines (or equity lines) have rates that adjust because the money is promised for the future and the lender doesn’t know what the cost of the money will be then.
The owner must keep up the property, keep the home insured and pay the property taxes.
There are many ways to use a HECM. You can use a HECM to buy a home, pay off your current mortgage, create an income stream or simply establish a credit line for the future.
Costs to set up a HECM can be similar to a regular mortgage or several thousand dollars higher. Why the difference? Higher costs usually result in more money being made available to the borrower from the start, lower interest rates or both.
Before applying for a Home Equity Conversion Mortgage counseling by a HUD (Housing and Urban Development the department FHA is under) counselor is required. Depending on the state, counseling is available over the phone and/or face-to-face. Costs very from free to around $200. Some agencies require payment at the time of counseling. Others will bill the cost to the closing of the loan.
After the counseling is completed, a HECM Counseling Certificate is issued. It is good for 6 months. When applying for a HECM the Certificate is given to the lender as proof the required counseling was completed successfully.
The application process involves an appraisal, which establishes the lending value for the transaction. The appraiser must be FHA certified. The lender, not the borrower or the loan originator chooses the appraiser. The appraiser will need to go into all rooms of the house, the attic cellar and all out buildings. Value will be determined by comparing 3 recent sales of similar properties within the last 6 months.
With the completed appraisal, the underwriter makes a lending decision which is shared (in writing) with the borrower. At that time the borrower usually receives the appraisal. If there are issues, they need to be resolved. Then, a closing day is set for the signing of the documents including the notes and mortgages.
The borrower then has 3 business days to rescind. It the borrower rescinds, the transaction is canceled and the borrower cannot be charged any penalty or costs. If the closing goes forward the legal documents are recorded with the city or town clerk. Any funds requested for the closing are disbursed to the borrower.