A reverse mortgage is a special type of home loan that allows a borrower to convert a portion of the equity in their home into cash. This can provide a source of income that people can access during retirement. The advantage of a reverse mortgage is that the borrower’s credit and income is not relevant to qualifying. The borrower does not need to make any repayments so long as the home is used as the principal residence and all obligations of the mortgage are met (such as making payments towards taxes and insurance relating to the home).
The type of reverse mortgage offered through the Federal Housing Administration (FHA) is a HECM (Home Equity Conversion Mortgage). The funds withdrawn from a HECM have the option to be a fixed monthly amount, a line of credit, or a combination of the two.
To be eligible for a FHA HECM, you must:
- Be 62 years of age or older (minimum age at application signing);
- Own the property outright, or have considerable equity;
- Occupy the property as your principal residence;
- Not be delinquent on any federal debt;
- Participate in a consumer information session given by a HUD-approved HECM counselor.
Some basic characteristics of HECM reverse mortgage loans are:
- Closing costs are typically rolled into the loan;
- No pre-payment penalty;
- Insured by FHA/HUD;
- A non-recourse loan, meaning that you won’t owe more than the home is worth;
- The funds you receive are tax free, and can be used for any purpose;
- You don’t relinquish the title to your home;
- You as the homeowner keeps all future appreciation in value;
- The equity is yours as the borrower. Upon leaving the property, you will pay back what you borrowed, plus interest.
Another interesting feature of a FHA HECM, is that it can be used to purchase a primary residence. But you must be able to use cash on hand to pay the difference between the HECM proceeds and the sum of the sales price plus the closing costs.
