HECM Reverse Mortgage: Definition, Requirements
A HECM reverse mortgage can help seniors supplement their retirement income and stay in their homes longer. However, it’s important to understand how HECM loans work — as well as their risks — so you can make an informed decision.
What is a HECM?
A home equity conversion mortgage, or HECM, is a reverse mortgage loan that’s insured by the Federal Housing Administration (FHA), which is part of the Department of Housing and Urban Development (HUD). HECMs allow seniors aged 62 and older to tap their home equity without selling their property. HECMs are the most common type of reverse mortgage loan.
Types of reverse mortgages
Aside from HECMs, there are two other types of reverse mortgages: proprietary and single purpose. Here’s a breakdown of each type:
- Proprietary reverse mortgage. Proprietary reverse mortgage loans are offered through private lenders and are not insured by the federal government. These loans are designed for people with higher home values who may not qualify for an HECM mortgage due to FHA loan limits.
- Single-purpose reverse mortgage. Single-purpose loans are offered by local governments and nonprofit organizations and are not federally insured. You can use these loans only for a specific purpose, such as home repairs or property taxes.
How does a HECM loan work?
With a HECM, you’re not required to make monthly payments — which is how these loans get their name. It’s a mortgage “in reverse” — instead of paying the lender each month, the lender pays you. The amount you can borrow with a HECM depends on the amount of equity you have in your home. In addition, you can only borrow up to the HECM loan limit set by the FHA. For 2024, that limit is $1,149,825.
The key benefit of a reverse mortgage is that it provides a steady stream of income without monthly payments. However, since you’re not paying off the loan, your debt grows instead of shrinking, as it would with a traditional mortgage. This is because interest is added to your balance each month.
You can typically choose to receive your HECM money in a few different ways, including:
→ One lump sum
→ Monthly payments
→ Line of credit
When it comes time to repay the reverse mortgage loan, you’ll owe more than the original amount you borrowed. A reverse mortgage will generally need to be paid off when you move out of your home or die.
HECM loan requirements
Aside from having to be 62 or older, HECM borrowers must meet the following requirements, according to HUD:
- You’ll need to have paid down your mortgage a significant amount or own your home outright
- You’ll need to live in the home as your primary residence
- You’ll have to meet with a HUD-approved housing counselor
- You can’t be delinquent on federal debt
- You’ll need to be able to afford ongoing homeownership expenses, including property taxes, insurance and HOA fees
In addition, your property must be a(n):
- Single-family home or a 2-4 unit home with one unit occupied by the borrower
- HUD-approved condominium project
- Individual condominium unit that meets FHA’s single-unit approved requirements
- Manufactured home that meets FHA requirements
Reverse mortgage vs. home equity loan
A reverse mortgage and home equity loan are both financial products that can help you convert your home equity to cash. One of the main differences is that a reverse mortgage doesn’t have monthly payments. With a home equity loan, you’ll have to repay your loan in monthly installments. If you take out a home equity loan, you’ll need to be able to afford both your current mortgage payment and the home equity loan payment.
How to get a HECM
1. Attend a housing counseling session
The first step to getting a HECM loan is to meet with a HUD-approved housing counselor. During the counseling session, you’ll receive detailed information about HECMs, including their eligibility requirements and financial implications, so you can make an informed decision. You can search for a HUD-approved housing counselor using this online search tool.
2. Compare reverse mortgage lenders
Like with any major financial decision, it’s a good idea to compare several different reverse mortgage lenders to ensure you get the best deal. When comparing lenders, pay attention to each company’s loan terms, interest rates and fees. Find FHA-approved reverse mortgage lenders.
3. Choose a lender and apply
Once you’ve chosen a reverse mortgage lender, the next step is to fill out a loan application. Be prepared to provide information about your financial situation, including your income and assets. You’ll also need to provide details about your property and any co-borrowers.
4. Close on the loan
Closing on a reverse mortgage loan will follow a process similar to that of a traditional mortgage. You’ll need to pay closing costs, which may include the following:
→ Appraisal fee
→ Inspection fee
→ Title search fee
→ Credit check fee
→ Recording fee
You’ll also need to pay an initial mortgage insurance premium to the FHA.
HECM pros and cons
| Pros | Cons |
|---|---|
Your loan is insured by the federal government You’ll receive a steady stream of income You won’t have a monthly mortgage payment You typically won’t need to pay taxes on the money you receive It won’t impact your Social Security or Medicare benefits | You’re required to live in the home as your principal residence You could lose your home if you don’t keep up with certain requirements, such as occupying your home as a primary residence, and cannot repay the loan if it is called due Your debt will increase and equity will decrease You’ll need to pay origination fees You’ll have to purchase mortgage insurance |
Frequently asked questions
There are several ways to get out of a reverse mortgage, including paying the loan off, refinancing and selling your home. If you change your mind about a reverse mortgage within three days of signing your loan contract, you can cancel the loan without penalty — this is known as the right of rescission.
HECM loan alternatives include selling your home and downsizing to a smaller property if you can no longer afford your current mortgage. If you’re strapped for cash, you can also consider a home equity loan, HELOC or cash-out refinance.
Ready to compare refinance offers? Get Your Best Rates from Top Lenders TodayYes, you can refinance a HECM, as you can with any other mortgage loan. You can either refinance into another reverse mortgage with better terms or a conventional loan, depending on your needs.
One of the biggest problems with reverse mortgages is their costs, including upfront and ongoing expenses. You’ll likely need to pay various closing costs and an origination fee. Further, you’ll also need to keep up with ongoing home maintenance, property taxes and insurance.