ByAli Sahabi of Optimum Group, LLC
President, Building Industry Association (BIA) Baldy View Chapter
In the homebuilding industry, we take considerable pride in the fact that for most Americans, their home is the cornerstone of their financial future - and one of the most important roles their home can play in their financial future is when homeowners begin approach their ‘golden years’ of retirement. Because Americans are living longer, healthier and more active lives and choosing to remain in their homes longer, ‘reverse mortgages’ enable them to use the accumulated equity in their homes to do so.
A reverse mortgage is actually a Home Equity Conversion Mortgage (HECM) administered through the Federal Housing Administration (FHA). HECMs enable older homeowners to withdraw some of the equity their homes have built up over the years to supplement Social Security, meet unexpected medical expenses, make home improvements and more by allowing them to convert a portion of the equity in their home into cash. However, unlike a traditional home equity loan or second mortgage, HECM borrowers do not have to repay the HECM loan until the borrowers no longer use the home as their principal residence or fail to meet the obligations of the mortgage. Homeowners can also use HECMs to purchase a primary residence if they 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 being purchased.
As with any financial product, there are many HECM programs to consider and they are designed to serve very specific needs, so here are some basic facts you should know courtesy of the FHA.
To be eligible for an FHA HECM, the FHA requires a homeowner to be 62 years of age or older, own their home outright or have a low mortgage balance that can be paid off at closing with proceeds from the reverse loan. They must also have the financial resources to pay ongoing property charges including taxes and insurance and live in the home. They are also required to receive consumer information free or at very low cost from a HECM counselor prior to obtaining the loan by contacting an HECM counselor online or by calling (800) 569-4287.
Homeowners may apply for a HECM regardless of whether or not their home was purchased with an FHA-insured mortgage. To be eligible, the home must be a single family home or a two- to four unit home with one unit occupied by the borrower. HUD - approved condominiums and manufactured homes that meet FHA requirements are also eligible. Unlike second mortgages or home equity lines of credit (HELOCs), HECMs have no monthly principal or interest payments. However, mortgagees are required to pay real estate taxes, utilities and hazard and flood insurance premiums. With HECMs, when the home is sold or no longer used as a primary residence, the cash, interest and other HECM finance charges must be repaid. All proceeds beyond the amount owed belong to the mortgagee’s spouse or estate. This means any remaining equity can be transferred to heirs. No debt is passed along to the estate or heirs.
The amount allowed by HECMs vary by borrower and depends on the age of the youngest borrower or non-borrowing spouse, the current interest rate and the lesser of appraised value or the HECM FHA mortgage limit or the sales price and the initial mortgage insurance premium. If there is more than one borrower, the age of the youngest borrower is used to determine the amount that can be borrowed.
Because HECMS are administered by the FHA, they do not recommend using any service that charges a fee for referring a borrower to an FHA-approved lender. FHA-approved lenders may be located by searching online at www.hud.gov or by contacting a HECM counselor for a listing. Services rendered by HECM counselors are free or at a low cost. To locate a HECM counselor, search the www.HUD.gov site for the HECM Counselor Roster or the National HECM Counseling Network or call (800) 569-4287 toll-free for the name and location of a HUD - approved housing counseling agency near you.
For more information on HECMs visit www.HUD.gov and search ‘reverse mortgages’ for comprehensive information. You can receive additional free information about reverse mortgages in general by contacting the National Council on Aging (NCOA) at (800) 510-0301 or visiting their www.NCOA.org website and downloading their free booklet, Use Your Home to Stay at Home.
The BIA Baldy View Chapter seeks to advance the opportunity to attain the American Dream of home ownership. For additional information on homebuying, home improvements or the benefits of homeownership, go to www.biabuild.com on the web.