HECMs, or Home Equity Conversion Mortgages, Are The Most Popular Form of Reverse Mortgage
The most common form of reverse mortgage in the United States is the Home Equity Conversion Mortgage, or HECM. All HECMs are insured by the Federal Housing Administration, or FHA, which means that, if a lender loses money as a result of a loan default, the government will repay part or all of their losses. Note that, just like other government-insured loans, reverse mortgages are issued by banks and private lenders, not the FHA. HECMs have a variety of rules, most of which are designed to protect borrowers. However, they do have a variety of restrictions, which may turn off some individuals.
HECMs Rules and Eligibility
One of the main rules surrounding HECM reverse mortgages is the fact that they have loan limits established by the federal government. The current lending limit for HECMs $679,650, though some believe this is likely to increase significantly in the next year or two, perhaps up to around $720,000. While borrowers with more expensive homes are still eligible for an HECM, $679,650 is the maximum amount of funds they can currently receive from their reverse mortgage. This is why borrowers who own homes worth $1 million or more sometimes decide to turn to non-HECM jumbo reverse mortgages, which can offer up to $3 million of funds for eligible borrowers.
In addition, HECMs require that the funds from a reverse mortgage first be used to pay off any existing loan balance. Therefore, borrowers using HECMs that don’t fully own their home may not get as much as they were expecting out of the reverse mortgage transaction. While there is no pre-set home equity requirement, most HECM applications should have a minimum of 50% equity in their home before applying. Even those that fully own their home may only be able to receive 55% of their home equity in reverse mortgage proceeds.
Other Alternatives to HECMs
If the restrictions around HECMs seem onerous to you, you may prefer to obtain a proprietary reverse mortgage. These are mortgages which are not insured by the FHA, and therefore do not come with many of the rules and consumer protections that are typically associated with HECMs. However, some of the same basic rules still apply: borrowers must be at least 62 years old and typically must use the home in question as their primary residence. Despite that, other, more specific rules vary. For instance, while new rules mandate that HECM borrowers undergo a financial assessment before being approved for a reverse mortgage, no such rule currently exists for proprietary reverse mortgages. Therefore, it may actually be easier to qualify for a proprietary reverse mortgage than an HECM, but, if you can’t pass the basic financial requirements of an HECM, you’re most likely better off avoiding a reverse mortgage altogether.
In addition, HECMs issued after 2014 allow non-borrower spouses to stay in the home after a borrower moves to a nursing home or passes away, given that they meet and continue to follow certain conditions. Qualifying spouses need to have been married to the borrowing spouse before they obtained the reverse mortgage, must stay current on property taxes and homeowner’s association fees, and must annually certify that they are an eligible spouse who is using the home as their primary residence. In contrast, it is up to an individual lender to decide if (and under what conditions) a non-borrowing spouse can stay in a home after the death or moving of the borrower.
HECMs, Proprietary Reverse Mortgages, and Loan Recourse Provisions
Finally (and perhaps most importantly), it’s essential to realize that HECMs are, by nature, non-recourse. This mens that, if you default, a lender can only take your home and cannot go after your personal property. Proprietary reverse mortgages, however, may be recourse, and that can be incredibly dangerous for borrowers who aren’t prepared. No one wants a lender to go after their personal property, especially if they’re already about to lose their home in the reverse mortgage foreclosure process. For that reason alone, HECMs are typically safer than proprietary reverse mortgage products, though both certainly have their place in the market.