By far, the most commonly used reverse mortgage is the one offered by the U S Department of Housing & Urban Development (HUD) through the Federal Housing Administration (FHA). This reverse mortgage program, known as the Home Equity Conversion Mortgage (HECM) has been around since 1989 and is government-backed. The HECM reverse mortgage is only available through an FHA-approved lender.
Eligibility Requirements for the FHA Reverse Mortgage
As with any reverse mortgage, the homeowner (borrower) must meet the following guidelines to be eligible:
- Be 62 years of age, or older
- Own the property free-and-clear, or have a minimal balance due
- Reside in the home as their principle place of residence
- Cannot have any delinquent federal debts (such as overdue income tax)
- Must participate in counseling by an HECM-approved organization
- The property must be a single-family dwelling, (up to) a 4-unit dwelling with the borrower occupying one of the units, an HUD-approved home, or a manufactured home that meets FHA requirements
Payment Options for the FHA Reverse Mortgage
The Home Equity Conversion Mortgage comes with the following payment options:
- Tenure ― A monthly stipend for life
- Term ― A monthly stipend for a fixed period, stipulated by the borrower
- Line of Credit ― Allows the borrower to access funds, up to a maximum, as needed
- Modified Tenure ― A combination of the Tenure option and the Line of Credit option
- Modified Term ― A combination of the Term option and Line of Credit option
Note that the homeowner may be able to modify the reverse mortgage payment options outlined above during the term of their loan. Make sure to check with the mortgage lender about their payment options and their policies on reverse mortgage modifications.
The Cost of an FHA Reverse Mortgage
Reverse mortgage closing costs can be included as part of the loan (a.k.a. “rolled into the loan”) with an HECM. Typical costs that come with an HECM reverse mortgage include the following:
- Origination fee ― currently anywhere from $2,500 – $6,000
- Closing costs ― may include fees charge for title search, property appraisal, home inspection, surveys, etc.
- Mortgage insurance premium
- Servicing Fee
- Interest Rate
Also remember that the funds you obtain from your reverse mortgage plan are considered tax-free (for income tax purposes).
In light of the recent increases in the cost of mortgage insurance ― which is required to protect the lender (in case the homeowner outlives the value of the home) and protect the homeowner (should the lender become defunct) ― the FHA will begin to offer a new reverse mortgage option that would allow borrowers to minimize the up-front costs of tapping into their home equity. In exchange, the homeowner/borrower would obtain lower proceeds from the reverse mortgage. This new reverse mortgage alternative, referred to as the HECM Saver, is scheduled to go into effect later this year.