Home equity conversion mortgages are safer than ever
Support offered by HECM lenders
- Pre-loan counseling so borrowers understand their obligations
- Monthly payout options to aid long-term financial planning
- Loan-payoff deferral options for surviving spouses
Reverse mortgages made headlines several years ago as retirees lost their homes because of complications arising over reverse mortgages. These stories of lost homes, ruined retirements and financial problems passed on to surviving spouses and children gave reverse mortgages a bad name at the time.
New rules put forth in recent years by the U.S. Department of Housing and Urban Development (HUD) are aimed at increasing the safety of home equity conversion mortgages (HECMs), the Federal Housing Administration's (FHA's) reverse mortgage program. Used wisely, an HECM reverse mortgage can be a safe and important part of a financial-retirement plan.
The biggest change is mandatory, pre-loan financial counseling. If you want to take out a home equity conversion mortgages (HECM) reverse mortgage, you must first sit down with an approved counselor to make sure you can fulfill all the requirements of the loan. You can find a counselor on the HUD.gov website. The counselor will cover the following:
- Program eligibility requirements;
- Alternatives to reverse mortgages; and
- Provisions for paying off the loan.
More importantly, during this counseling session, borrowers must prove they can afford the ongoing financial responsibilities associated with their property. To secure an HECM, borrowers prove they can pay property taxes, home-insurance payments, homeowner association or condo-unit fees, and maintain the home in accordance with the loan agreement.
After completing this mandatory counseling, retirees can then find an FHA-approved lender to begin the loan process.
Another major change made by HUD was to offer structured, long-term payments through a variable-rate HECM loan. These loans help seniors use reverse mortgages as an integral part of their retirement plans, providing a monthly stream of money they can use to pay bills and maintain their lifestyle.
You can chose from the following five plans:
- Equal monthly payments for life, for as long as you live in the home.
- Equal monthly payments for a selected, fixed amount of time.
- A line of credit with payments made in amounts and at times you choose until you exhaust line of credit.
- A combination of monthly payments for life (as in No. 1 above) and a line of credit.
- A combination of monthly payments for a fixed amount of time (as in No. 2 above) and a line of credit.
You can still get a lump-sum payment by taking out a fixed-rate HECM. This can be useful for emergencies or to help you move into a more manageable space while selling your home. All HECM requirements still apply, however, so you must complete counseling and prove you can meet the financial obligations of your home.
The third major change made by HUD helps to prevent surviving spouses from getting evicted from their homes after their spouses pass away. This rule provides a deferral period on paying off the loan as long as the surviving spouse continues to live in the house.
To qualify for this deferral, the surviving spouse must:
- Have been married to the borrower for the entire duration of the loan;
- Have been disclosed to the lender and named in the loan;
- Have occupied and continue to occupy the property;
- Establish legal ownership of the property within 90 days of the borrowing spouse’s death; and
- Ensure all other obligations in the HECM loan documents.
HECM loans, when used properly as part of a complete financial retirement plan, can help seniors enjoy the equity of their homes while continuing to live in them for the rest of their lives.