To qualify for the FHA-insured Home Equity
Conversion Mortgage ( HECM) reverse
mortgage, borrowers must be at least 62 years of
age and the home must be their primary
residence (second homes and investment properties do not qualify).
There are certain protections to
spouses younger than age 62. Under the old
guidelines, the reverse mortgage could only be written for the spouse who
was 62 or older. If the older spouse died, the reverse mortgage balance
became due and payable. If the surviving spouse didn't have the ability to
pay off or refinance the reverse mortgage balance, he or she was forced to
either sell or give up ownership of the home. This often created a
significant hardship for spouses of deceased HECM mortgagors, so FHA revised
the eligibility requirements. Under the new guidelines, spouses who are
younger than age 62 at the time of origination retain the protections
offered by the HECM program if the older spouses dies. This means that the
surviving spouse can remain living in the home without having to repay the
reverse mortgage balance as long as they keep up with property taxes and
homeowners insurance and maintain the home to a reasonable level.
For a reverse mortgage to be a viable financial option, existing mortgage balances usually must be low enough to be
paid off with the reverse mortgage proceeds.
However, borrowers do have the option of paying down their existing mortgage
balance to qualify for a HECM reverse mortgage.
The HECM reverse mortgage follows the standard
FHA eligibility requirements for
property type, meaning most 1–4 family dwellings, FHA approved condominiums,
and PUDs qualify.
Manufactured homes also qualify as long as they meet FHA standards.
Before starting the loan process for an FHA/HUD-approved reverse
mortgage, applicants must take an approved counseling
An approved counselor should help explain how
reverse mortgages work, the financial and tax implications of taking out a
reverse mortgage, payment options, and costs associated with a reverse
mortgage. The counseling is meant to protect borrowers,
although the quality of counseling has been criticized by groups such as the
Consumer Financial Protection Bureau.
In a 2010 survey of elderly Americans, 48% of respondents cited financial
difficulties as the primary reason for obtaining a reverse mortgage and 81%
stated a desire to remain in their current homes until death.
On March 2, 2015, FHA implemented new guidelines that require reverse
mortgage applicants to undergo a financial assessment. Though HECM borrowers
are not required to make monthly mortgage payments, FHA wants to make sure
they have the financial ability and willingness to keep up with
property taxes and
homeowner's insurance (and any other applicable property charges).
Financial assessment involves evaluating two main areas:
- Residual income - Borrowers must have a
certain amount of residual income left over after covering monthly
- Satisfactory credit - All housing and
installment debt payments must have been made on time in the last 12
months and there are no more than two 30-day late mortgage or installment
payments in the previous 24 months. There is no major derogatory credit on
revolving accounts in the last 12 months.
If residual income or credit does not meet FHA guidelines, the lender can
possibly make up for it by documenting extenuating circumstances that led to
the financial hardship. If no extenuating circumstances can be documented,
the borrower may not qualify at all or the lender may require a large amount
of the principal limit (if available) to be
carved out into a Life Expectancy Set Aside (LESA)
for the payment of property charges (property taxes,
homeowners insurance, etc.).
The HECM reverse mortgage offers fixed and
adjustable interest rates. The fixed-rate
program comes with the security of an interest rate that does not change for
the life of the reverse mortgage, but the interest rate is usually higher at
the start of the loan than a comparable adjustable-rate HECM.
Adjustable-rate reverse mortgages typically
have interest rates that can change on a monthly or yearly basis within
Applicants for a HECM reverse mortgage will likely notice that there are
two different interest rates disclosed on their loan documents: the initial interest rate, or IIR, and the
expected interest rate, or EIR:-
interest rate (IIR)
|The initial interest rate, or IIR, is the actual note rate at which
interest accrues on the outstanding loan balance on an annual basis. |
For fixed-rate reverse mortgages, the IIR
can never change. For adjustable-rate
reverse mortgages, the IIR can change with program limits up to a
lifetime interest rate cap.
Expected interest rate (EIR)
|The expected interest rate, or EIR, is used mainly for calculation
purposes to determine how much a reverse mortgage borrower qualifies for
based on the value of the home (up to the
maximum lending limit of $625,500) and age of the youngest
borrower. The EIR is often different from the actual note rate, or IIR.
The EIR does not determine the amount of interest that accrues on
the loan balance (the IIR does that).|
The total pool of money that a borrower can receive from a HECM reverse
mortgage is called the principal limit (PL),
which is calculated based on the maximum claim amount
(MCA), the age of the youngest borrower,
the expected interest rate (EIR), and a table to PL
factors published by HUD. Similar to
loan-to-value (LTV) in the forward mortgage world, the principal limit is
essentially the percentage of the value of the home that can be lent under
the FHA HECM guidelines. Most
PLs are typically in the
range of 50% to 60% of the MCA, but they
can sometimes be higher or lower. The table below gives examples of
principal limits for various ages and EIRs and a property value of $250,000.
|Borrower’s age at origination
||Expected interest rate (EIR)
||Principal limit factor (as of Aug. 4, 2014)
||Initial principal limit based on MCA of $250,000
The principal limit tends to increase with age and decrease as the EIR
rises. In other words, older borrowers tend to qualify
for more money than younger borrowers, but the total amount of money
available under the HECM program tends to decrease for all ages as interest
Closing costs, existing mortgage balances,
other liens, and any property taxes or homeowners insurance due are
typically paid out of the initial
principal limit. Any additional proceeds
available can be distributed to the borrower in several ways:-
Options for distribution of proceeds
The money from a reverse mortgage can be distributed in four ways,
depending on the borrower's financial needs and goals:
|Lump sum in cash at settlement|
|Monthly payment (loan advance) for a set number of years (term) or
|Line of credit (similar to a
home equity line of credit)|
|Some combination of the above|
Note that the adjustable-rate HECM offers
all of the above payment options, but the
fixed-rate HECM only
offers lump sum.
The line of credit option accrues growth, meaning that whatever is
available and unused on the line of credit will automatically grow larger at
a compounding rate. This means that borrowers who opt for a HECM line of credit can potentially
gain access to more cash over time than what they initially qualified
for at origination.
The line of credit growth rate is determined by adding 1.25% to the
initial interest rate (IIR), which means the line of credit will grow faster
if the interest rate on the loan increases.
Because many borrowers were taking full draw lump sums (often at the
encouragement of lenders) at closing and burning through the money quickly,
HUD sought to protect borrowers and the
viability of the HECM program by
limiting the amount of proceeds that can be accessed
within the first 12 months of the loan.
If the total mandatory obligations (which
includes existing mortgage balances,
all closing costs, delinquent federal debts, and purchase transaction costs)
to be paid by the reverse mortgage
are less than 60% of the principal limit, then the borrower can draw
additional proceeds up to 60% of the principal limit in the first 12 months.
Any remaining available proceeds can be accessed after 12 months.
If the total mandatory obligations exceed
60% of the principal limit, then the borrower can draw an additional 10% of
the principal limit if available.
HECM for purchase
HECM mortgagors have the opportunity to purchase a
new principal residence with HECM loan proceeds — the so-called
HECM for Purchase
program. Applies if the borrower is able to pay the difference between the
HECM and the sales price and closing costs for the property.
The program was designed to allow the elderly to purchase a new principal
residence and obtain a reverse mortgage within a single transaction by
eliminating the need for a second closing.
Reverse mortgages are frequently criticized over the issue of closing
costs, which can sometimes be expensive. The following are the most typical
closing costs paid at closing to obtain a reverse mortgage:
- Counseling fee: The first step to get a reverse mortgage is to
go through a counseling session with a HUD-approved counselor. The average
cost of the counseling session is usually around $125, but counselors
often don't charge at all.
- Origination fee: This is charged by the lender to arrange the
reverse mortgage. Origination fees can vary widely from lender to lender
and can range from nothing to several thousand dollars.
- Third party fees: These fees are for third-party services hired
to complete the reverse mortgage, such as appraisal, title insurance,
escrow, government recording, tax stamps (where applicable), credit
- Initial mortgage insurance premium (IMIP): This is a one-time
cost paid at closing to FHA to insure the reverse mortgage and protect
both lenders and borrowers. The IMIP protects lenders by making them whole
if the home sells at the time of loan repayment for less than what is owed
on the reverse mortgage. This protects borrowers as well because it means
they will never have to pay out of other assets to settle up the reverse
mortgage if they owe more than the home is worth. How the IMIP is
calculated was changed in late 2013 with Mortgage Letter 2013-27. The IMIP
is now charged as either 0.50% or 2.50% of the max claim amount (which
usually equals the appraised value of the home up to a maximum of
$625,500), depending on how much of the principal limit is utilized within
the first 12 months of the loan. If the utilization is under 60% of the
principal limit, the lower rate applies. If it's above that amount, then
the higher rate applies.
The vast majority of closing costs typically can be rolled into the new loan amount
(except in the case of HECM for purchase, where they're
included in the down payment), so they don't need to be paid out of
pocket by the borrower. The only exceptions to this rule may be the
counseling fee, appraisal, and any repairs that may
need to be done to the home to make it fully compliant with the FHA
guidelines before completing the reverse mortgage.
estimated closing costs using several standardized documents, including the
Reverse Mortgage Comparison,
Total Annual Loan Cost (TALC),
Closing Cost Worksheet, and
the Good Faith Estimate (GFE).
These documents can be used to compare loan
offers from different lenders.
There are two ongoing costs that may apply to a reverse mortgage:
annual mortgage insurance and
servicing fees. Like
IMIP, annual mortgage insurance is charged by
FHA to insure the loan and accrues annually at a rate of 1.25% of the loan
balance. Annual mortgage insurance does not
need to be paid out of pocket by the borrower; it can
be allowed to accrue onto the loan balance over time.
Servicing fees are less common today than in
the past, but some lenders may still charge them to cover the cost of
servicing the reverse mortgage over time. Servicing fees, if charged, are
usually around $30 per month and
can be allowed to accrue onto the loan balance
(they don't need to be paid out of pocket).
Taxes and insurance
Unlike traditional forward mortgages, there are no escrow accounts in the
reverse mortgage world. Property taxes and
homeowners insurance are paid by the homeowner
on their own, which is a requirement of the HECM
program (along with the payment of other property charges such as
expectancy set aside (LESA)
If a reverse mortgage applicant fails to meet the
satisfactory credit or residual income
standards required under the new financial assessment guidelines
implemented by FHA on March 2, 2015, the lender may require a Life Expectancy Set Aside, or
LESA. A LESA carves out a portion of the
reverse mortgage benefit amount for the payment of property taxes and
insurance for the borrower's expected remaining life span. FHA implemented
the LESA to reduce defaults based on the nonpayment of property taxes and
The American Bar Association guide
advises that generally,
|The Internal Revenue Service
does not consider loan advances to be income.|
|Annuity advances may be partially taxable.|
|Interest charged is not deductible until it is actually paid, that is,
at the end of the loan.|
|The mortgage insurance premium is
deductible on the 1040 long form.|
The money received from a reverse mortgage is considered a loan advance.
It therefore is not taxable and does not
Social Security or
Medicare benefits. However, an
American Bar Association guide
to reverse mortgages explains that if borrowers receive
SSI, or other public benefits, loan
advances will be counted as "liquid assets" if the money is kept in an
account (savings, checking, etc.) past the end of the calendar month in
which it is received; the borrower could then lose eligibility for such
public programs if total liquid assets (cash, generally) is then greater
than those programs allow.
When the loan
The HECM reverse mortgage is not due and payable until the last borrower
(or non-borrowing spouse) dies, sells the house, or
fails to live in the home for a period greater than 12
The loan may also become due and payable if the borrower fails to pay
homeowners insurance, lets the condition of the
home significantly deteriorate, or transfers the title of the
property to a non-borrower (excluding trusts
that meet HUD's requirements).
Once the reverse mortgage loan comes due, borrowers or
heirs of the estate have several options to settle up the loan balance:
- Pay off or refinance the existing balance to keep the
- Sell the home themselves to settle up the loan balance
(and keep the remaining equity).
- Allow the lender to sell the home (and the remaining
equity is distributed to the borrowers or heirs).
The HECM reverse mortgage is a non-recourse loan, which
means that the only asset that can be claimed to repay the loan is the home
If there's not enough value in the home to settle up
the loan balance, the FHA mortgage insurance fund covers the difference.
Reverse mortgages have been criticized for several major
|Possible high up-front costs make reverse mortgages
expensive. In the U.S., entering into a reverse mortgage will cost
approximately the same as a traditional FHA mortgage; depending on the
|The interest rate on a reverse
mortgage may be higher than on a
conventional "forward mortgage".|
|Interest compounds over the life of a reverse mortgage,
which means that "the mortgage can quickly balloon".
Since no monthly payments are made by the borrower on a reverse mortgage,
the interest that accrues is treated as a loan advance. Each month,
interest is calculated not only on the principal amount received by the
borrower but on the interest previously assessed to the loan. Because of
this compound interest, as a reverse mortgage's
length grows, it becomes more likely to deplete the entire equity of the
That said, with an FHA-insured HECM reverse mortgage obtained in the US or
any reverse mortgage obtained in Canada, the
borrower can never owe more than the value of the property and
cannot pass on any debt from the reverse mortgage to any heirs. The sole
remedy the lender has is the collateral, not assets in the estate, if
|Reverse mortgages can be confusing; many obtain them
without fully understanding the terms and conditions,
and it has been suggested that some lenders have sought to take advantage
A majority of respondents to a 2000 survey of elderly Americans failed to
understand the financial terms of reverse mortgages very well when
securing their reverse mortgages.
"In the past, government investigations and consumer advocacy groups
raised significant consumer protection concerns about the business
practices of reverse mortgage lenders and other companies in the reverse
But in a 2006 survey of borrowers by AARP, 93 percent said their reverse
mortgage had a mostly positive effect on their lives, compared with 3
percent who said the effect was mostly negative. Some 93 percent of
borrowers reported that they were satisfied with their experiences with
lenders, and 95 percent reported that they were satisfied with the
counselors that they were required to see.|
mortgage or home equity conversion
mortgage (HECM) is a type of home loan for
older homeowners (62 years or older) that requires no monthly
mortgage payments. Borrowers are still
responsible for property taxes and homeowner’s insurance.
mortgages allow elders to access the
equity they have built up in their homes now, and defer payment of the
loan until they die, sell, or move out of the home. Because there are no
mortgage payments on a
mortgage, the interest is added to the loan
balance each month. The rising loan balance can eventually grow to exceed
the value of the home, particularly in times of declining home values or if
the borrower continues to live in the home for many years. However, the
borrower (or the borrower’s estate) is generally not required to repay any
additional loan balance in excess of the value of the home.
Proceeds from a
The money from a
mortgage can be distributed in several different
|as a lump sum, in cash, at settlement|
|as an annuity, with a cash payment at regular intervals|
|as a line of credit, similar to a
home equity line of
|as a combination of these.|
The borrower remains entirely responsible for the
property. This includes physical maintenance.
In addition, some programs require periodic
reassessments of the value of the property.
Income from a
mortgage set up as an annuity or as a line of
credit should not affect
However, income from a
mortgage set up as a lump
sum could be considered a financial investment and thus deemed
taxable ; this category includes all sums over
$40,000 and sums under $40,000 that are not spent within 90 days.
When the loan comes due
mortgage comes due – the
loan plus interest must be repaid – when the borrower dies, sells the
property, moves out of the house, or breaches
the contract in some way.
Prepayment of the loan – when the borrower pays the loan
back before it reaches term – may incur penalties,
depending on the program.
An additional fee could also be imposed in the event of a redraw.
"Some providers offer a 'no negative
equity guarantee'. This means that if the balance of the loan exceeds
the proceeds of sale of the property, no claim for this excess will be made
against the estate or other beneficiaries of the borrower."
On 18 September 2012, the Government introduced statutory
'negative equity protection' on all new
mortgage contracts. This means you cannot end up
owing the lender more than your home is worth (the market value or equity).
mortgage contract ends and the borrowers home is
sold, the lender will receive the proceeds of the sale and the borrower
cannot be held liable for any debt in excess of this (except in certain
circumstances such as fraud or misrepresentation). Where the property sells
for more than the amount owed to the lender, the borrower or their estate
will receive the extra funds.
COSTS CAN BE
|Real estate appraisal = $175–$400|
|Legal advice = $400–$600|
|Other legal, closing, and administrative costs = $1,495|
you don’t have to make monthly payments. The lender
doesn’t collect until the homeowner moves, sells or dies. Once the home is
sold, any equity that remains after the loan is repaid is distributed to the
To qualify, you have to be 62 or older.
You would have to make payments on a
line of credit or loan.
The fact that counseling is required from a
government-approved agency for loans made through the
Federal Housing Administration’s Home Equity Conversion
Mortgage (HECM) program is an indication
of the complexity of this financial product. Still, many seniors don’t
understand what they are getting into.
People complained to the CFPB
about their loan terms, the
loan servicing companies, and
not being able to add a borrower. Adult
children complained that lenders refused to add them as an additional
borrower or allow them to “assume” the loan for an aging or deceased parent,
the report said.
CFPB tips :-
|▪ Double check that your loan records accurately reflect who is on
|▪ Be sure to understand the risks of not including a spouse
on the loan. Often an older spouse will take out a
mortgage in his or her name only because
older homeowners are able to borrow against a
greater percentage of the home’s equity. |
“Non-borrowing spouses submit complaints distraught that they are facing
foreclosure and about to lose their home after their husband or wife
dies,” according to the report. “Other non-borrowing spouses submit
complaints worried about their ability to remain in their home should the
older spouse die first.”
If you decide it’s financially better for just one spouse to take out a
mortgage, be sure to have a plan for the
non-borrowing spouse. Can a surviving spouse stay in the home? The
Department of Housing and Urban Development has attempted to address the
issue of non-borrowing spouses. Under certain conditions, some spouses may
be able to stay but others may not get that protection.
The CFPB recommends that if only one spouse
is on the
mortgage, you should find out if the loan
servicer will permit the non-borrowing spouse to qualify for a repayment
deferral allowing him or her to remain in the home.
|▪ Talk to your heirs. If you have adult children or other
relatives living in the house, be sure they understand what could happen
mortgage becomes due. |
Go to the CFPB web site at
and click the link for the agency’s consumer advisory on
There are some pros to a
mortgage. But the complexity of the product
means you better be just as aware of the cons.
With the equity you've built up in your home you can stop
paying a mortgage and a lender starts sending you checks regularly (or in a
lump sum or line of credit) !
mortgages can indeed serve many retirees well,
but they're not perfect for everyone, and they have some downsides worth
mortgage is essentially a loan, with the amount
borrowed not having to be repaid until you die, sell
your home, or stop living in it (perhaps because you moved to a
nursing home). At that time, the home can be sold to cover the debt, or your
heirs can pay it off and keep the home.
mortgage income is often tax-free, which is
another big plus.
Dangers, pitfalls, and things to know
There are some dangers and pitfalls associated with
mortgages, though, and in many cases, what you
don't know can cost you. Let's run through some facts.
|For starters, many people have been pressured into
mortgages by pushy salespeople.
mortgages can be complicated contracts, too,
so be sure to review all the terms closely, to ask questions, and perhaps
to have a financial professional review the deal.|
closing costs, just as with regular
mortgages, and they tend to be costlier. The
applicable interest rates tend to be higher,
|You may not receive as much income through a
mortgage as you might have expected. The
amount you can borrow depends on factors such as how much longer you (and
your spouse, if you have one) are expected to live, the value of the home,
the equity you have in it, and prevailing interest rates.
Interest charges are added to the balance of the
loan over time.|
|You'll still be on the hook for home-related expenses
such as property taxes,
home insurance, home repairs, and maintenance. Those can be
substantial. Miss out on some of these payments, such as property taxes,
and your lender might be able to close out the loan, causing you
|Once you leave your home, it will likely need to be
sold to pay off the
mortgage. If you'd hoped to leave it to your
children, you won't be able to do so unless the
mortgage loan can be paid off in some other
way. Some people have run into trouble if they got sick and were
out of their home for an extended time, such
as in rehab -- as their lender then moved to close out the loan and take
possession of the house. |
|Receiving income from a
mortgage might hurt your eligibility for
various benefits, such as Medicaid and
Supplemental Security Income. So while it can
boost your income, it may also reduce it. |
|In the past, when a
mortgage holder has died, the surviving spouse
often ended up defaulting on the loan and facing foreclosure. Regulations
have recently strengthened protections for spouses, but it's worth taking
a close look at any fine print and asking pointed questions. It can be
especially dangerous if your spouse is not included in the loan.|
|When some people have tried to refinance their
mortgage, they've discovered that their equity
is much smaller than they thought, because holding a
mortgage shrinks your equity in part via accrued interest expenses
|Some people have complained to the
Consumer Finance Protection Bureau that their
mortgages with variable
interest rates raised the rates too quickly, costing them more, and
that they were not able to renegotiate terms.|
|If you're not disciplined, you can spend too much of
mortgage money too soon (especially if you've
received it as a lump sum) and can end up in worse financial shape.|
Be smart about
The key to knowing whether a
mortgage is right for you is to learn everything
you can about them. In some cases, if you need the income and liquidity that
they can provide, then
mortgages will be a good tool in your retirement
mortgage can be a terrific solution for those
who find themselves cash-poor in retirement. It's far from a simple thing,
though, and it does have some drawbacks and warrants some cautions. If
you're thinking of getting a
mortgage, here are some smart
mortgage moves you might want to make.
- Be wary of anyone urging you to get a
mortgages are sometimes pushed by those with
conflicts of interest and those who may not offer you the best deal. Do
your own homework, shop around, and perhaps approach lenders on your own
instead of through a salesperson.
- Think of the
mortgage as a loan, and not as an investment.
mortgage, you essentially borrow money based
on your home equity and don't have to pay it back until you die or stop
living in your home. The lender pays you in regular installments or a lump
sum or gives you a line of credit. Don't let any salesperson tell you that
mortgage is a smart investment. They generally
cost a lot and are not all about growing your wealth.
- Know that a
mortgage will often remove your ability to
leave your heirs your home.
If you've been planning to leave your home
to your loved ones, a
mortgage can remove those plans. When you die
or permanently leave your home (such as by moving into a nursing home),
your loan will often need to be repaid. They often requires the immediate
sale of your home. But if your heirs can pay off the loan, they may be
able to keep the home.
- Know that the amount you
have borrowed will increase over time.
When you get a
mortgage, it won't be for the total value of
your home. It will be for a portion of that, and your loan balance will
rise over time, as interest costs are added
to it. When the
mortgage ends and the loan needs to be repaid,
you won't be on the hook for more than the balance
of your home.
- Know that as with regular
mortgages, there will be closing costs.
mortgages tend to be more costly than regular
mortgages. The kinds of costs you may pay
include a loan origination fee,
servicing fees, and
title insurance. Typically there's also
- Know that
mortgage income could hurt you in unexpected
Receiving income from a
mortgage might hurt your eligibility for
various benefits, such as Medicaid and
Supplemental Security Income.
- Include your spouse in the
mortgage or have a provision for him or her.
The amount you can borrow with a
mortgage depends in part on the age of the
borrower, and when a couple is borrowing, it's typically the age of the
younger one that matters. In the past, when
mortgages have been taken out by one partner
who later dies or moves out, the other partner has sometime been forced to
sell the home or has defaulted on the loan and faced foreclosure. Recent
regulations have better protected spouses, but it's worth looking into the
terms of the
mortgage you're considering, to learn just how
your spouse will be treated and whether it's smart to have both of you as
borrowers. Note, too, that any children or others who live with you may be
adversely affected by a
mortgage coming due.
- Before getting a
mortgage, consult a
You can find a
mortgage counselor via the
U.S. Department of Housing and Urban Development's
website or their housing counselor referral service at
800-569-4287. You might also consult with a
financial advisor or two, to explore all your options and make informed
decisions. You can look for a fee-only one at
www.napfa.org . With any advisor you
consult, ask whether they have any ties to the
mortgage industry and will benefit in any way
if you get a
- Consult with your family, too.
If you're getting -- or even thinking about
getting -- a
mortgage, it's a good idea to let your family
members know about it and to make sure they know how that might affect
- Remember that you may have other options, and
look into them.
There are often other income-producing
options you might look into, besides
dividend-paying stocks, for example, or annuities, or perhaps a
home equity loan. Remember that Social
Security will offer some income in retirement, too, but the average annual
benefit was recently only about $16,000.