If you are a homeowner age 62 or older and have paid off your mortgage or paid down a considerable amount, and are currently living in the home, and are eligible, you may participate in FHA’s Home Equity Conversion Mortgage (HECM) program.
The HECM is FHA’s reverse mortgage program that enables you to withdraw some of the equity in your home with limitations or a single disbursement lump-sum payment at the time of mortgage closing.
You can also use a HECM to purchase a primary residence if you are able to use cash on hand to pay the difference between the HECM proceeds and the sales price plus closing costs for the property you are purchasing.
How the Program Works
There are many factors to consider before deciding whether a HECM is right for you. To aid in this process, you must meet with a HECM counselor to discuss program eligibility requirements, financial implications and alternatives to obtaining a HECM and repaying the loan. Counselors will also discuss provisions for the mortgage becoming due and payable. Upon the completion of HECM counseling, you should be able to make an independent, informed decision of whether this product will meet your specific needs.
There are borrower and property eligibility requirements that must be met. You can call me to see if you qualify. If you meet the eligibility criteria, you can complete a reverse mortgage application by contacting a FHA-approved lender.
The lender will to discuss other requirements of the HECM program, the loan approval process, and repayment terms.
The following eligible property types must meet all FHA property standards and flood requirements:
You may be eligible for one of the following payment plans:
Mortgage Amount Based On
The amount you may borrower will depend on:
You can pay for most of the costs of a HECM by financing them and having them paid from the proceeds of the loan. Financing the costs means that you do not have to pay for them out of your pocket. On the other hand, financing the costs reduces the net loan amount available to you.
The HECM loan includes several fees and charges, which includes:
1) mortgage insurance premiums (initial and annual) ,
2) third party charges ,
3) origination fee ,
4) interest and , and
5) servicing fees.
The lender will discuss which fees and charges are mandatory.
You will be charged an initial mortgage insurance premium (MIP) at closing. The initial MIP will be .5 percent or 2.5 percent, depending on your disbursements. Over the life of the loan, you will be charged an annual MIP that equals 1.25% of the mortgage balance.
- Mortgage Insurance Premium
You will incur a cost for FHA mortgage insurance. The mortgage insurance guarantees that you will receive expected loan advances. You can finance the mortgage insurance premium (MIP) as part of your loan.
- Third Party Charges
Closing costs from third parties can include an appraisal, title search and insurance, surveys, inspections, recording fees, mortgage taxes, credit checks and other fees.
- Origination Fee
You will pay an origination fee to compensate the lender for processing your HECM loan. A lender can charge a HECM origination fee up to $2,500 if your home is valued at less than $125,000. If your home is valued at more than $125,000 lenders can charge 2% of the first $200,000 of your home’s value plus 1% of the amount over $200,000. HECM origination fees are capped at $6,000.
- Servicing Fee
Lenders or their agents provide servicing throughout the life of the HECM. Servicing includes sending you account statements, disbursing loan proceeds and making certain that you keep up with loan requirements such as paying real estate taxes and hazard insurance premium. Lenders may charge a monthly servicing fee of no more than $30 if the loan has an annually adjusting interest rate and $35 if the interest rate adjusts monthly. At loan origination, the lender sets aside the servicing fee and deducts the fee from your available funds. Each month the monthly servicing fee is added to your loan balance. Lenders may also choose to include the servicing fee in the mortgage interest rate.
Reverse Mortgage Program and Application Process
The application for a reverse mortgage loan generally takes 30-45 days from beginning to end and the process steps may vary by lender.
A lender cannot begin processing a reverse mortgage loan application until the homeowner has completed Housing and Urban Development (HUD) required counseling and submitted a signed Home Equity Conversion Mortgage (HECM) Counseling Certificate. Counseling is available by phone from national agencies or face-face and by phone with regional agencies.
The loan application contains disclosures of the reverse mortgage loan fees, interest rates, and loan proceeds. The application is not binding and the homeowner is not responsible for any expenses.
The home appraisal determines the current market value of the property. A reverse mortgage loan appraisal must be conducted by a Federal Housing Administration (FHA) approved appraiser according to FHA guidelines.
The reverse mortgage lender will conduct a title search and address with the applicant any issues such as trusts, unpaid liens on the title, bankruptcies, etc. Once the lender has completed underwriting and the application is approved, the application status will change to “clear to close” status and a closing date will be scheduled.
On the closing date, the applicant will sign the final closing documents. The homeowner should check to make sure that the interest rates, fees, and proceeds have not changed.
After signing, the homeowner has a three business day “right of rescission” period in which the applicant can still cancel the application without penalty.
After the rescission waiting period, the title company will send a check by overnight mail to the homeowner.
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