Sitting on a rocking chair on the porch, you reminisce. The very house you live in right now shares a huge chunk of your life. You’d never want to be somewhere else in the world.
You’ve been paying your mortgage religiously and punctually for years, it is about time you reap the rewards.
Wouldn’t it be nice if you can loan some cash without having to pay the lender monthly? Sounds too good to be true. Well, the truth is it is very possible.
HECM: FHA’s Reverse Mortgage Program
Senior homeowners can qualify for the Home Equity Conversion Mortgage ( HECM). This is a reverse mortgage loan program the federal government offers. Just like any FHA loan, it is a government-guaranteed loan. Meaning, a lending company or a bank funds the loan and FHA insures this institution in an uneventful case of a default.
How does an HECM work?
Qualified seniors can turn a portion of their home equity into usable cash which they can put towards health care, monthly expenditures or other needs. In a reverse mortgage, the loan is not paid by the borrower monthly. It is the lender who pays the borrower. The time that the borrower needs to pay for the loan is when he/she decide to sell the property, move out of the house or if the borrower dies. In these cases, the borrower (or his/her family, in the case of death) will start paying for the loan.
Another case that may cause the borrower to pay earlier than necessary is when he/she fails to pay the monthly property taxes, homeowner’s insurances, homeowners association fees, utility and hazard insurances.
This means that as long as the borrower keeps up with the charges and fees on tax and insurances, and continues living in the home he is not required to pay the loan back.
Who is eligible for an HECM loan?
Here are the requirements for a borrower to qualify for an HECM loan:
- The borrower has to be 62 years old or older
- He/she must own the house outright or has paid the property down considerably
- The property must be the primary residence of the borrower
- He/she must be current on his/her federal taxes and other debts
- Must receive an HECM counseling with an approved counselor
- Must undergo a financial assessment
- The home must be a single-family unit or a 2-4 unit home with one occupied by the borrower. The house must also meet the FHA standards.
The FHA requires a reverse mortgage counseling for borrowers at the beginning of the loan process. This is to educate borrowers on how things work with a reverse mortgage, its costs and tax implications, as well as the advantages and the disadvantages of having one. The FHA-approved counselor will also need to know the reasons for applying for the loan. This way, the counselor can help the borrower look for alternative fund sources that are more efficient and beneficial than having the reverse mortgage loan. In the end, it is still the borrower’s decision to continue on the loan process or not.
A financial assessment is usually done to determine if the borrower will have enough money to pay for the monthly loan payments. In a reverse mortgage, however, the goal is to see whether the borrower will be able to keep up with the property taxes and insurances and other association dues for the entire life of the loan.
In a financial assessment, verification on the borrower’s income, assets, credit history and recurring expenses will be done. Also, payments on property taxes and insurances will be verified if they have been paid punctually.
How is the fund disbursed?
In the loan process, the borrower will be asked on the desired payment plan. He/she can opt to be paid on a fixed monthly rate, on a line of credit, be paid a lump sum or a combination of these. This will also be discussed during the counseling.
The borrower will never be forced to take a loan even if he/she is eligible for a reverse mortgage loan. If, after the closing, the borrower chooses to cancel the loan; he/she may do so within three calendar days. The Three Day Right of Rescission Law and all other important things to know about reverse mortgage loans is discussed at the beginning of the loan process. Visit the official HUD website to learn more about HECM.
Shopping for an approved lender, asking the right people on important questions and making informed decisions will always be the keys in choosing the best loan for you. A sound choice can make your retirement years shine like gold.