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Federal programs

A reverse mortgage draws on equity with no monthly mortgage payment, repaid when the last borrower leaves

A reverse mortgage is a loan against the equity in the home you live in that is repaid when the last borrower dies, sells, or moves out, rather than in monthly payments. The one the federal government insures is the Home Equity Conversion Mortgage, or HECM, insured by FHA and made only by an FHA-approved lender; California Mortgage Solutions arranges it for homeowners in San Luis Obispo County. HUD requires counseling from a HUD-approved counselor before the loan can be made, and the homeowner keeps paying the property taxes, the homeowners insurance and the upkeep of the home for as long as the loan is open.

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The program in one box

What it is
A Home Equity Conversion Mortgage, or HECM: the reverse mortgage the federal government insures through FHA, made only by an FHA-approved lender. You borrow against the home's equity, and the balance grows as interest and the premium are added to it each month.
Who it is for
A homeowner of sixty-two or over who lives in the home as a principal residence, has enough equity to pay off any mortgage still on it, and can keep paying its taxes, insurance and upkeep.
Counseling
HUD requires it, from a HUD-approved counselor, before the loan can be made. The session covers the costs, the alternatives, what the loan asks of you, and what it means for the people who live with you and for your heirs.
How the money comes out
In the ways HUD's payment plans allow: a line of credit, monthly draws for a term you choose or for as long as you live in the home, a lump sum at closing, or a line combined with monthly draws. How much is available is set by HUD's rules and depends on the youngest borrower's age, the rate and the home's value.
What you still pay
Property taxes, homeowners insurance, any association dues and the upkeep of the home, on time, and you certify each year that you live there. Falling behind on any of them can make the loan due and can end in foreclosure.
When it comes due
When the last borrower dies, unless an eligible non-borrowing spouse remains in the home, or sells the home or no longer lives in it as a principal residence, and it can be called due when the taxes, insurance or upkeep go unmet. The loan is usually repaid by selling the home.
Non-recourse
The borrower has no personal liability for the balance, and the lender can look only to the home: if the home sells for less than what is owed when the loan is repaid, FHA's insurance covers the difference, and no deficiency judgment follows.
Where it is not the answer
A homeowner who expects to move before long, since the up-front costs are paid once and the loan comes due at the move, or one whose heirs expect the house clear of a loan. A home equity line of credit (HELOC) or a home equity loan can cost less for a homeowner whose income and credit qualify for one.

What this program is good at

  • No monthly mortgage payment for as long as you live in the home and keep up the taxes, the insurance and the upkeep. Interest and the premium are added to the balance instead of being paid each month.
  • The home stays yours. Title stays in your name, and you can live there for as long as you meet the loan's obligations.
  • You will not owe more than the home is worth when it is sold: under FHA's non-recourse rule you have no personal liability for the balance, and the insurance covers any shortfall at the sale.
  • A line of credit option whose unused portion grows over time, as the Consumer Financial Protection Bureau describes it, so credit you leave untouched can be larger when you come to need it.

Who qualifies

What a lender weighs before this program is on the table. A lender can add rules of its own, and those rules can differ from one lender to the next.

Your age and the home's ownership

The youngest borrower must be sixty-two or over at closing, and each borrower must own the home. If you still owe on a mortgage, the reverse mortgage pays it off first, so the equity has to be enough to clear that loan with something left over, and a large balance can mean there is little left or that the loan cannot be made.

The home

It must be the principal residence of each borrower, and you certify every year that you live there. FHA's rules say which homes qualify: a one-family home, a condominium unit HUD accepts, and the other dwellings HUD lists, each of which must meet FHA's property standards, so an appraisal looks at condition as well as value and can require repairs.

HUD's financial assessment

HUD's financial assessment looks at your credit history, your cash flow and residual income, and at how your property charges have been paid. Where the assessment raises a doubt, the lender can set part of the loan aside to pay the taxes and insurance for you.

Counseling

Before the loan can be made, you must complete counseling with a HUD-approved counselor, and so must a spouse who will not be a borrower and any other owner of the home. The counselor is independent of the lender and of us, and you can take the session while you are still deciding whether a reverse mortgage is right for you at all.

How it works with us

What happens once you get in touch

The steps in order, so you can see what is coming. Nothing here is underwritten until a lender underwrites it.

  1. Counseling first

    We can talk through what a reverse mortgage is and is not before anything else, but HUD's counseling comes before the loan can be made. HUD keeps a roster of approved counselors, and the session is where to bring every question about the costs, the alternatives, your spouse and your heirs.

  2. The application

    With the counseling complete, you apply through us. We take the home, who lives in it, what is owed on it, and how you would want the money to come out, and your loan officer places the file with an FHA-approved lender.

  3. Appraisal and financial assessment

    The lender orders an FHA appraisal of the home and carries out HUD's financial assessment of your credit history, your cash flow and residual income, and how your property charges have been paid. Nothing is underwritten until the lender underwrites it.

  4. Closing and the right to cancel

    At closing you choose a payment plan from the ones HUD allows. On a loan secured by the home you live in, other than one that buys the home, Regulation Z gives you a right to cancel for a short time after closing, and the notice you receive gives the date that right expires; no money is paid out until it has passed.

What people ask about this program

If yours is not here, call us. The useful answer depends on your file.

What is a reverse mortgage?

A reverse mortgage is a loan against the equity in the home you live in, for a homeowner of sixty-two and over, that is repaid when the last borrower dies, sells the home or moves out rather than in monthly payments. The one the federal government insures is the Home Equity Conversion Mortgage, or HECM, insured by FHA and made by an FHA-approved lender. Interest and the FHA mortgage insurance premium are added to the balance each month, so the balance grows and the equity shrinks over time, and the homeowner keeps paying the property taxes, the homeowners insurance and the upkeep of the home.

Do I have to take counseling before a reverse mortgage?

Yes. HUD requires every HECM borrower, along with a spouse who will not be a borrower and any other owner of the home, to complete counseling with a HUD-approved counselor before the loan can be made. The counselor is independent of the lender, and the session covers the costs, the alternatives, the obligations that continue and what the loan means for your household and your heirs. You can take it while you are still deciding.

When does a reverse mortgage have to be repaid?

A HECM becomes due and payable when the last surviving borrower dies, unless an eligible non-borrowing spouse remains in the home, when the home is sold or title is conveyed, or when the home stops being the borrower's principal residence, which includes a long absence for illness, and it can be called due when the property taxes, the homeowners insurance or the upkeep go unmet. It is usually repaid by selling the home, and the balance can never be collected from anything but the home.

Can my heirs keep the house after a reverse mortgage?

They can, if they repay the loan. When the last borrower dies, the loan comes due, and the heirs can keep the home by paying it off, with their own money or a new loan, or sell it and keep whatever the sale brings over the balance. If the home is worth less than the balance, the loan is non-recourse: the heirs do not owe the difference, and FHA's insurance covers it once the home is sold. Talk to your heirs about these choices now rather than leaving them to find out later.

Home equity

Home equity lines and home equity loans

A line of credit secured by your home, or a loan paid in one sum, that sits behind any first mortgage, which stays as it is. The rate on a line can change, and falling behind puts the home at risk.

  • It leaves your first mortgage in place, under its own terms. A cash-out refinance replaces that loan with a larger one, and the new loan's rate and terms replace the old.
  • You borrow against the line as you need to, up to its limit and within the plan's rules, rather than taking a single sum at once, and as you repay, that credit can become available to borrow again.
  • Once a line is open, Regulation Z bars the lender from changing its terms except in the cases the regulation lists.
More about HELOC

Government-insured

FHA loan

Government-insured, with credit score tiers HUD publishes.

  • FHA publishes its own credit floor, so you can find out where you stand before any lender's opinion enters it.
  • The 203(k) option finances a house that needs work and the work itself in one loan.
  • An FHA streamline refinance exists for a loan that is already FHA, if the loan meets FHA's conditions at the time.
More about FHA

Not government-insured

Conventional loan

A loan for solid credit and income, with private mortgage insurance that does not have to be permanent.

  • Private mortgage insurance does not have to be permanent. On a one-unit home you live in, the Homeowners Protection Act of 1998, subject to its conditions and exceptions, gives you the right to ask for borrower-paid mortgage insurance to come off once the loan is paid down far enough against the home's original value, and requires it to end automatically at a later point on the loan's amortization schedule.
  • It works for a primary residence or an investment property of one to four units, and for a one-unit second home. FHA and VA are built for a home you live in; FHA allows a second home only in narrow hardship cases.
  • There is no federal credit floor on a conventional loan, and Fannie Mae's Desktop Underwriter sets no minimum score of its own: it weighs the credit with its own risk factors and returns what the file needs.
More about Conventional

Where this program fits:Buying a homeRefinancingThe county's loan limitsThe Central CoastServices

Side by side:Reverse mortgage vs HELOC

Published by

California Mortgage Solutions Inc. · Company NMLS #325189

This page is general information about a loan program, not an offer of credit or a commitment to lend. What a lender will do with your file depends on the file.

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