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Housing - Reverse Mortgages - HECM

In an ordinary home equity loan, a homeowner borrows money against the equity in his or her home, making payments to reduce the loan balance after the funds are received. As payments are made, the principal balance of the loan decreases. A reverse mortgage allows a homeowner to access his or her home equity without paying the balance back immediately. In fact, the loan is paid off when the homeowner dies or moves, or when other conditions named in the loan documents occur. Consequently, the loan balance actually increases until final payment is made.

Reverse mortgages provide a valuable tool for the elderly, who often live on a fixed income, by allowing them to access funds without requiring immediately payback. Reverse mortgages are available through both the public and private sectors. Private-sector plans that are insured by the United States Department of Housing and Urban Development (HUD) offer more benefits to lenders and homeowners than their noninsured counterparts. These mortgages are called Home Equity Conversion Mortgages (HECM). A separate article discusses reverse mortgages generally; this article discusses the ways in which HECM reverse mortgages differ.

Who Is Eligible For An HECM Mortgage?

Homeowners who wish to obtain HECM reverse mortgages must meet both personal requirements and requirements relating to the property.

Personal Requirements

There are four personal requirements homeowners must meet to be eligible for HECM reverse mortgages, relating to age, property ownership, residence, and counseling. First, the homeowner must be at least 62 years of age. He or she must own the property and the property must be the homeowner's primary residence. Finally, the homeowner must undergo mandatory counseling before the loan closes.

The homeowner need not meet any income or asset requirements, and no credit qualifications are required.

Property Requirements

To be eligible for an HECM reverse mortgage, the property to be insured must be either a one-family home or a one- to four-unit home, and it must meet minimum property standards prescribed by HUD. Condominiums, cooperatives, and mobile homes may be eligible if they meet HUD guidelines.

How Much Money Is Available?

The amount available to borrow depends on several factors, including some relating to the eligibility requirements. Fundamental requirements are the youngest homeowner's age, the interest rate, and the lesser of the appraised value of the home or the insurance limit of the Federal Housing Administration (FHA).

As with other reverse mortgages, the principal and interest are not paid until the homeowner dies or moves, or until another condition set forth in the loan paperwork occurs.

What Does It Mean That An HECM Loan Is "Federally Insured"?

HECM loans benefit lenders because if, when repayment is due, the home's value is not enough to pay off the loan, the FHA will pay the deficiency. The FHA funds the insurance program by charging homeowners an annual premium and an up-front payment.

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