As many senior homeowners are aware, The Department of Housing and Urban Development (HUD), recently announced changes which will affect the Home Equity Conversion Mortgage (HECM), also known as a reverse mortgage. These announcements may have caused some confusion with seniors wondering, is a reverse mortgage government funded?
Reverse Mortgages are Federally Insured
The short answer to that question is no, reverse mortgages are not government funded. HECM loans are typically funded by a private lender and insured by the federal government.
The Federal Housing Administration (FHA) insures1 all HECM loans to protect borrowers as well as lenders. While there are some privately issued reverse mortgages that do not require FHA insurance, HECM loans are more common and offer certain protections to borrowers. For example, if a borrower takes out a reverse mortgage and then later decides to move, they will be protected, even if their home has decreased in value since taking out the loan. FHA insurance ensures that HECM borrowers will never owe more on the home than the home is worth.
Benefits of Federally Insured HECM Loans
Although borrowers must pay an initial insurance premium and an ongoing annual premium in order to secure a federally insured HECM loan, the unique benefits of a reverse mortgage make it an attractive option. When compared to other loans that can be used to access home equity, FHA insured reverse mortgages have these benefits:
- Pay Off Existing Mortgage(s) – A HECM can be an alternative option to a traditional refinance. Borrowers do not need to own their home free and clear. The proceeds from a HECM loan must be used first to pay off an existing mortgage and the rest can be disbursed to the borrower. The borrower will no longer have to make any monthly mortgage payments for as long as they continue to meet the loan obligations.2
- Flexible Distribution Options – Borrowers can receive the proceeds from their HECM loan as a lump sum3, monthly payments, a line of credit, or a combination of options. The distribution option can also be changed when needed.
- No Maturity Date – The balance on a HECM loan will not become due, nor will it require repayments for as long as the borrower(s) occupies the home as their primary residence and continues to meet the loan obligations.2
- Non-Recourse Loan – If the home is sold to repay the balance, the borrower or their heirs will never owe more than the value of the property.
- Fee limitations – The origination fees on a HECM are restricted by the Department of Housing and Urban Development (HUD) regulations and may be financed as part of the loan. This means there are very little out-of-pocket expenses.
- No Prepayment Penalty– Although the loan typically is not due until the borrower permanently vacates the home2, it can be paid off at any time with no additional costs.
Safeguards for Federally Insured HECM Loans
Even though the government does not directly fund HECM loans, borrowers can feel safe knowing that the government has implemented safeguards to ensure that borrowers who take out a HECM reverse mortgage are well informed and understand their options.
For example, all borrowers are required to complete a counseling session with a HUD approved counselor prior to moving forward with a reverse mortgage. This requirement ensures that borrowers receive unbiased information and guidance around the pros and cons of a HECM loan.
In addition to counseling, HUD is responsible for ensuring that the regulations they set are being followed by lenders. Lenders who do not abide by the rules often see their license to fund federally insured HECM loans revoked.
A Very Important Loan for American Seniors
While the government has only been insuring HECM loans since the late 80s, there have been many positive changes since then to foster the growth of the program and keep it accessible to seniors who have built up equity in their homes. More and more seniors are finding that their largest investment during retirement is their homes and the HECM loan offers a much needed means to accessing retirement funds.
To learn more about how a reverse mortgage may be able to help you achieve your financial goals, you can consult with a licensed loan advisor who will prepare a free eligibility assessment. Your loan advisor will:
- Determine if you meet the basic eligibility requirements
- Get a better understanding of your financial goals, and
- Recommend the best loan product for your needs.
For more information, call (800) 976-6211.
Important Disclosures:
1 Federal Housing Administration (FHA) mortgage insurance premiums (MIP) will accrue on your loan balance. You will be charged an initial MIP at closing. The initial MIP will be 2% of the home value not to exceed $12,723. Over the life of the loan, you will be charged an annual MIP that equals .5% of the outstanding mortgage balance.
2 You must live in the home as your primary residence, continue to pay required property taxes, homeowners insurance, and maintain the home according to FHA requirements. Failure to meet these requirements can trigger a loan default that may result in foreclosure.
3 Lump sum distributions are only available for fixed-rate loans. The funds available to the borrower may be restricted for the first 12 months after loan closing, due to HECM reverse mortgage requirements. In addition, the borrower may need to set aside additional funds from the loan proceeds to pay for taxes and insurance.