HECM For Home Purchase – The Basics
“A no monthly mortgage payment*, home-equity loan for seniors.” (*)
Get an estimate of how much of a down payment you may need by using this calculator.
The basics explained: A mortgage is a mortgage is a mortgage. Traditionally a person buys a house, finances it; makes payments; and pays their property taxes & home-owners insurance. You can sell the house at any time and pay back the lender. As an owner (with a lien, of course), one can modify the house; paint the walls odd colors; install funky carpet and maybe even a swimming pool. A HECM is no different, except you don’t make mortgage payments, and at least one borrower must be age 62.* It’s that simple!
*(On Aug 4th, 2014 a HUD rule went into effect (Mortgagee Letter 2014-07) – now all spouses (age 18+) will have their tenure protected. If the spouse is age 62 or older, they are co-borrowers, and if they are younger than 62 (but age 18+) they would be considered a Non-Borrowing Spouse. The Non-Borrowing Spouse (NBS) will have protected tenure. This HUD 2014 rule does not protect the tenure of dependent children residing in the house, or spouses who marry HECM borrowers after the loan is taken out.
To qualify: The lender (per FHA) doesn’t require monthly mortgage payments, just a financial assessment is required (rather than credit score) to determine eligibility. Borrowers need sufficient down payment funds, this is about 50-60%% of the purchase price (or less) depending on the age of the youngest borrower. You must pay your property taxes, insurance, maintain the home, and otherwise comply with loan terms.
Interest rates: Since the lender is rarely at risk of serious financial loss due to a defaulted loan (i.e. no mortgage payments and FHA insures the loan from various defaults) the lender can often charge lower interest rates than traditional mortgages. These interest rates are usually based on the LIBOR (an international index). Do we need to mention Fixed Rate?
Payments: As mentioned before, the borrower never has to make monthly mortgage payments* to the lender, for life. Even if life is 50+ years longer, or just 6 months – whatever “life” is, as long as the borrower maintains the house to lender/HUD standards; pays their property taxes & home-owners insurance, and lives in the property as their primary residence. Borrower must also comply with all other terms of the loan.
Funds to close: Prospective mortgagors must use their own money (money obtained from sale of assets, and/or sale of current home) for the required monetary investment. Examples include:
- Checking / Savings account
- Sale of real estate including former home
- Gift from family
- Sale of assets such as investments
Safety and security: The Home Equity Conversation Mortgage (HECM), is fully FHA insured. What this means is; the FHA will insure the borrower’s funds are not impacted. Including:
- If the home’s value at the time of settlement is less than the amount owed, the FHA will make up the loss (some restrictions apply of course).
- If the lender were to fail under the obligations of the contract, FHA will step-in to become the lender.
Reverse debt: Unlike traditional mortgages where the balance owed is decreasing with every mortgage payment, the HECM for Home Purchase has an increasing balance. In a normal economy the home usually increases in value, and thus the home’s equity grows larger. With a HECM for Home Purchase, the loan balance increases, but so does the home’s value, potentially maintaining or increasing home-equity despite the ever-increasing loan balance. Remember, the FHA will only allow about half of the appraised value to be borrowed.
- Closing costs for a HECM (origination fee, mortgage insurance premium, appraisal and other upfront costs). But these closing costs can be financed into the loan.
- If you are the only homeowner and you stay in an assisted living or nursing facility for more than 1 year, you will be required to repay the balance of the loan. You can always pay off the loan from the sale of your home, or by doing a refinance on the existing balance owed.
- Borrowers must keep their home in good repair, pay property taxes and homeowners insurance, and otherwise comply with loan terms. If you do not have enough money for these expenses, you could face foreclosure and lose your house.
Disadvantages to heirs: The senior is “spending the kid’s inheritance”. but in the long run, the home’s equity can be a benefit to the senior – enhancing the retirement years.
Costs: We do not charge a deposit. You are responsible for paying the cost of your FHA appraisal and for the cost of HECM counseling. Most other fees are added to the loan balance, such as: title search; title insurance; local taxes; etc.. These are normal costs for any traditional mortgage. Also HUD charges an up-front MIP fee of 2%.
(*) Borrowers are still responsible for property taxes, homeowner’s insurance, and complying with loan terms.