About HECM Loans

Overview

What is a Home Equity Conversion Mortgage (HECM)?
What is the difference between a HECM loan and a home equity loan?
Is any home eligible for a HECM loan?

Benefits

Does the borrower have to make monthly mortgage payments?
Are there credit score requirements necessary to qualify?
Does the borrower still own their home with a HECM loan?
Does a HECM loan affect a borrower’s eligibility for Social Security or Medicare benefits?

HECM Loan Proceeds

How much money can the borrower receive?
How can the borrower receive their money from a HECM loan?
What are the out of pocket costs?
Does the borrower have to pay taxes on the money they get from a HECM loan?
Are there any restrictions on how the loan proceeds can be used?

Loan Repayment

Does the borrower have to repay a HECM loan?
Will the borrower ever have to pay more than the home is worth?
What happens to the borrower’s home when they pass away?

Overview

What is a Home Equity Conversion Mortgage (HECM)?
A Home Equity Conversion Mortgage (HECM) is a loan that allows the borrower(s) to access a portion of their home equity and convert it into tax-free 1 retirement funds. With this type of loan, the borrower(s) maintain the title to home. The loan typically becomes due when the last borrower(s) permanently leave the home. Provided the home is sold to repay the loan, the borrower(s) will never owe more than the appraised value of the home.

1 Consult a financial advisor and appropriate government agencies for any effect on taxes or government benefits.

What is the difference between a HECM loan and a home equity loan?
In a traditional mortgage or a home equity line of credit (HELOC), the borrower(s) must meet minimum income and credit requirements to qualify for the loan and make monthly loan payments. With a HECM loan, there are generally no credit score requirements, nor do the borrower(s) have to make monthly loan payments.

Back to top

Is any home eligible for a HECM loan?
Most single-family homes, two-to-four unit1 owner-occupied dwellings, townhouses, approved condominium units, and some manufactured homes are eligible for a HECM loan. The home must meet FHA minimum property standards. If home repairs are required, in some cases they can be completed after closing using funds from the HECM loan.
1 Not applicable to HECM for Purchase

Benefits

Does the borrower(s) have to make monthly mortgage payments?
No. Unlike a traditional home mortgage or equity loan, the borrower(s) do not have to make monthly loan payments and any existing mortgage will be paid off using the loan proceeds. As with all mortgage loans, the borrower(s) must continue to pay their property taxes and homeowners’ insurance.

Back to top

Are there credit score requirements necessary to qualify?
There are generally no credit score requirements to be eligible for a HECM loan.

Does the borrower(s) still own their home with a HECM loan?
Yes. As with traditional mortgages, the borrower(s) keep the title to your home and the lender becomes a lien holder. The borrower(s) own and can remain in their home as long as you meet all the HECM loan requirements.

Back to top

Does a HECM loan affect a borrower’s eligibility for Social Security or Medicare benefits?
A HECM loan usually does not affect eligibility for Medicare or Social Security entitlement benefits. Some needs based government benefits, such as Medicaid and Supplemental Security Income (SSI), may be affected by a HECM loan. The borrower(s) should consult a qualified professional to determine if there would be any impact to their government benefits.

Back to top

HECM Loan Proceeds

How much money can the borrower(s) receive?
The amount of funds available to the borrower(s), also known as the Principal Limit, from a HECM loan is determined by the age of the youngest borrower, current interest rates, the lesser of the home’s appraised value, sale price or the maximum lending limit and the balance of the existing mortgage (if applicable) and all mandatory obligations as defined by the HECM requirements. In general, the older the borrower(s) are, the more equity the borrower(s) have in their home and the more money they can receive from a HECM loan.
The funds available to the borrower may be restricted for the first 12 months after loan closing, due to HECM requirements. Consult a Liberty Loan Advisor for detailed program terms.

How can the borrower(s) receive their money from a HECM loan?
The borrower(s) can receive the money in a lump sum payment with a fixed rate loan. With an adjustable rate loan, borrower(s) can receive the money in a lump sum payment, a monthly check, a line of credit, or a combination of these options. The borrower(s) choose the option that best fits their needs.

How can the borrower(s) receive their money from a HECM loan?

The borrower(s) can receive the money in a lump sum payment with a fixed rate loan. With an adjustable rate loan, borrower(s) can receive the money in a lump sum payment, a monthly check, a line of credit, or a combination of these options.

The borrower(s) choose the option that best fits their needs.

Borrowers may access the greater of 60 percent of the principal limit amount or all mandatory obligations, as defined by the HECM requirements, plus an additional 10% during the first 12 months after loan closing. The combined total of mandatory obligations plus 10% cannot exceed the principal limit amount established at loan closing. Consult a Liberty advisor for further details.

What are the out of pocket costs?
In some instances the counseling fee may be waived. All other costs – such as origination fees, third-party closing costs, FHA mortgage insurance premiums, and other mandatory obligations – may be able to be financed as part of the loan.

Back to top

Does the borrower(s) have to pay income taxes on the money they get from a HECM loan?
No. Since the money the borrower(s) receive from a HECM loan is not considered income, it is not taxable. Please have them consult a tax advisor.

Are there any restrictions on how the loan proceeds can be used?
No. Once any existing mortgage is paid off and mandatory obligations are fulfilled, the borrower(s) can use the money from their HECM loan any way they like. Many people put the money into a line of credit for home repairs or improvements. Others use it to pay property taxes, medical costs or in-home healthcare expenses. The borrower(s) can even use it for a vacation, a new car or to help their grandchildren pay their college expenses. The borrower(s) can use it however they want – it’s their money!

The funds available to the borrower may be restricted for the first 12 months after loan closing, due to HECM requirements. Consult a Liberty Loan Advisor for detailed program terms.
Back to top

Loan Repayment

Do the borrower(s) have to repay a HECM loan?
Yes, eventually. However, the loan isn’t due as long as the borrower(s) live in their home as their primary residence, they maintain it according to FHA requirements and they pay required property taxes and insurance.

Will the borrower(s) ever have to pay more than the home is worth?
No, provided the borrower(s) or their heirs choose to sell the home to repay the loan, the borrower’s repayment responsibility is limited to the value of the home. The borrower(s) or their heirs may extinguish the HECM loan debt at any time and keep the borrower(s) home by repaying the full loan balance.

What happens to the borrower’s home when they pass away?
Upon the death of the last borrower on title, the HECM loan becomes due. The borrower(s) heirs can either sell the home to repay the loan or keep the home by repaying the full loan balance. If the borrower(s) home’s value appreciates during the term of the reverse mortgage loan the borrower(s) heirs keep any remaining equity after repaying the HECM loan.

Back to top

Note: THESE PAGES ARE INTENDED FOR PRODUCER/AGENT USE.

 

Leave a Reply