Usually referred to as a Home Equity Conversion Mortgage (HECM), a FHA reverse mortgage is a federally insured program administered by the Federal Housing Administration (FDA), which is a department of the Department of Housing and Urban Development (HUD). Simply put, this program is 100% guaranteed by the government. For this reason alone, over 90% of American seniors elect an FHA program over others that are available.
Unlike a normal (forward) mortgage, a reverse mortgage is where a lender gives the borrower an agreed amount of money and the loan is not payable until the owner no longer lives in the house, sells it or dies. There are no monthly repayments.
To be eligible the borrower must be 62 years of age or older. Only certain homes qualify and these include single family dwelling or a two-to-four unity, townhouses, detached homes, units in condominiums and some manufactured homes are also eligible, however, condominiums must be FHA-approved. Properties that are ineligible include vacation, second and rental homes, most co-op apartments, houseboats, mobile homes, and commercial properties.
There can also be more than one borrower if both live at the same property. However, if the co-owner is younger than 62, the residence is not eligible unless the co-owner signs a quitclaim deed conveying the title to the over-62 co-owner.
There must be none or less than 25% mortgage remaining on the home.
The amount that can be borrowed is determined by the amount of the equity, the location of the property, current interest rate and age of the borrower(s). The maximum that can be borrowed is capped. The maximum amount is reviewed every year.
At no stage is the lender entitled to the house deeds; they remain in the homeowners hands. When the loan is due for repayment, it must be paid as one lump sum. This does not mean the home has to be sold; the debt can be paid from any number of sources. The property can be passed to heirs who can then pay back the loan any way they wish.
What does federally insured mean?
A lender agrees to give a borrower a certain amount of money, usually monthly installments, for as long as the borrower lives in the home. The lender makes a calculation of how much can be lent (and their profit) based on value of the equity in the home, interest rate, location of the home and the age of the borrower. Basically, the lender works out how much they can afford to pay the borrower based on value of the home plus the life expectancy of the borrower.
What can happen is that the borrower could live for another 40 years. The lender could be left in a position where the equity in the home is not sufficient to pay forty years worth of installments. This would mean that the borrower wouldn't get the money they were promised.
Another scenario is that the value of the home could fall; unlikely, but it can happen. This would also jeopardize the lender's ability to pay the borrower what was promised.
Finally, the lender could go out of business for any number of reasons, which would mean the borrower would not receive the promised payments.
The FHA guarantees that is the borrower will receive the money they're entitled to, no matter what.
AN FHA reverse mortgage isn't going to suit everyone's requirements but for the vast majority of seniors it's the easiest to understand and safest program and has brought real financial freedom to many.
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