The Federal Housing Administration (the FHA) was established in 1934 by President F.D. Roosevelt, part of the more comprehensive National Housing Act of 1934 (NHA). The National Housing Act essentially restructured the entire banking system in the United States when the Great Depression caused an economic & housing market collapse. The Federal Housing Administration was initially tasked with insuring loans to homeowners, which then authorized the FHA’s ability to:
- Regulate interest rates.
- Regulate the terms of the mortgages insured.
Three decades after its inception, the FHA became a part of the federal government’s Department of Housing & Urban Development (HUD). For nearly eight decades, the FHA has insured mortgages (but does not actually fund these mortgages) – for both single and multi-family homes – offered by FHA-approved lenders.
Essentially, the mortgages insured by the FHA offer mortgage lenders the opportunity to reduce the risk they absorb when lending to individuals with less than perfect credit, or those with minimal down payments. The costs of insurance offered by the FHA are built into the mortgagor’s monthly payment.
In 1988, then-President Ronald Reagan signed the Housing & Community Development Act into law, which included the ability to offer the first HECM – the first Federal Housing Administration-insured Home Equity Conversion Mortgage – or as its more commonly known as – a Reverse Mortgage.
What Are Your Options for a Reverse FHA Mortgage?
The federally-insured FHA reverse mortgage – the Home Equity Conversion Mortgage (HECM) – is designed to allow homeowners to convert the existing equity in their home into an income stream or a line of credit, even if the homeowner has an outstanding mortgage loan when applying for a reverse mortgage. Older homeowners who require a source of income during their lifetime and do not plan to sell their home will benefit the most from an FHA reverse mortgage loan.
Often, a home equity conversion mortgage is helpful to senior homeowners as it can:
- Provide aging homeowners with income to pay for medical bills, and other expenses, etc.
- Provide a supplementary income stream to help in retirement, to name a few options.
However, it is essential to note that a reverse mortgage has certain restrictions. Similar to other FHA-insured mortgages, those who wish to apply for an FHA-insured reverse mortgage may be required to pay mortgage insurance as it reduces the risk (the uncertainty of the loan) a lender takes with offering a reverse mortgage – money to a borrower in which the lender has no idea when the loan will be repaid.
Homeowner Eligibility Requirements
With a HECM, reverse mortgage lenders perform a financial evaluation of the borrower when making an underwriting decision. This analysis may require homeowners to set aside a portion of the loan’s proceeds for the lender to remit payment for property taxes and/or homeowner’s insurance premiums on behalf of the borrowers.
The FHA reverse mortgage loan is eligible for homeowners who are at least 62 years old. Also, homeowners must meet these requirements:
- Complete consumer counseling and required education before a reverse mortgage is approved. The FHA offers an online HECM Counselor Roster to help find the HECM counselors. This counseling session will help guide homeowners in deciding as to whether a reverse mortgage will work for them and will cover topics like:
- How the reverse mortgage works.
- Eligibility requirements.
- Financial implications.
The FHA-approved counselor also must explain the alternative funding options that include other nonprofit or governmental programs.
The fee for this service is typically about $125. Note, however, that this counseling fee can be included in the loan proceeds, and one cannot be denied simply because they can’t pay the fee.
- Homeowners must own and live in the subject property as their primary residence that is either without debt or with significant equity present.
- Homeowners must not be currently delinquent on a federal debt.
- Be capable of paying for the other expenses associated with maintaining the subject property – i.e., homeowner’s insurance, property taxes, or other HOA fees.
- FHA approved mortgage lenders may also generate other loan conditions based on the homeowner’s specific situation.
- Credit history will be verified.
Subject Property Eligibility Requirements
FHA-insured mortgages require the subject properties to meet specific criteria, as follows:
- Be a single-family or a multi-family (two to four families), with one unit being occupied by the owner.
- Meet all Federal Housing Administration (FHA) flood requirements/property standards.
- Condos must have full project approval or meet FHA single-unit condo approval requirements.
- Manufactured properties are eligible if the property complies with FHA requirements.
It is noted that unlike other Federal Housing Administration-insured mortgage loans, a reverse mortgage has no income requirements or credit qualifications that determine eligibility. However, homeowners applying for an FHA-insured home equity conversion mortgage will have their home appraised by an FHA-approved appraiser. The appraised value will help determine the mortgage loan amount a borrower will be eligible for if the loan amount falls below the FHA’s insurance limits.
According to HUD – the U.S Dept. of Housing & Urban Development memorandum (dated 12/2019), the maximum claim for a Federal Housing Administration’s insured reverse mortgage (for the calendar year 2020) is $765,600 – which is equivalent to 150% of Freddie Mac’s $510,400 conforming loan limit for the same timeframe.
How is a Reverse Mortgage Amount Determined?
The Federal Housing Administration (FHA) approved lender will calculate the eligible mortgage amount based on these factors:
- The current interest rates at the time of closing.
- The lesser of the appraised value or an FHA reverse mortgage limit for FHA locations.
- The age of the youngest of all eligible borrowers, co-signers, or the age of an eligible nonborrowing spouse. Recent changes at the FHA now include the following – if a nonborrowing spouse is included, the lender’s analysis for the mortgage amount may include the age of the youngest nonborrowing spouse.
Please note, reverse mortgages allow for closing expenses to be rolled into the reverse mortgage.
With regard to reverse mortgages, generally speaking, the older one is, the more equity one has in their primary residence, and the less debt on the property, the more money one can potentially receive when applying for a reverse mortgage.
Available Reverse Mortgage Options
While it is possible to use an FHA Home Equity Conversion Mortgage for the purchase of a primary residence, the majority of FHA reverse mortgages are provided to homeowners who currently own their home. There are several ways a homeowner can receive the proceeds from the reverse mortgage. These are discussed below:
- For fixed interest rate reverse mortgages, homeowners receive a single disbursement lump sum plan. This option typically provides the lowest loan amount when compared to other reverse mortgage options.
- For adjustable interest rate reverse mortgages, homeowners have the option of these payment plans:
- A line of credit (LOC) – unscheduled use of available funds that can be used at any time, until the borrower hits their line of credit maximum limit.
- By Tenure – this includes fixed monthly payments made as agreed as long as one borrower remains in the property as their principal residence.
- By Term – his includes fixed monthly payments for a pre-determined amount of months/years.
- A Modified Tenure – a combo of scheduled payments (with a borrower residing in the property) and a line of credit.
- A Modified term – equal payments for a pre-determined amount of months/years, and a line of credit.
- Borrowers may have the option to change their chosen payment option for a small fee.
While some borrowers may opt to repay part or all of a reverse mortgage, most borrowers do not repay these mortgages until such time the property is sold, or the borrower/homeowner does not choose to live in the property as their primary residence. Once the subject property is sold, and the home equity conversion mortgage has been paid in full, any remaining equity belongs to the homeowner(s) and/or their heirs.
If the sale of the subject property not be sufficient to pay the loan entirely, however, the Federal Housing Administration’s insurance will be used to satisfy the shortfall.
In the home equity conversion mortgage program, borrowers are typically eligible to live in a medical facility/nursing home for up to one year, before the reverse mortgage becomes due and payable.
Typical Expenses Associated with Home Equity Conversion Mortgage
Fortunately, most expenses associated with a reverse mortgage can be included in the mortgage proceeds, although that will reduce the amount a borrower will receive accordingly. HECM costs typically include:
- Mortgage Insurance Premiums (MIP) – The initial MIP will be 2% of the loan amount; however, during the life of the loan, borrowers are charged a yearly Mortgage Insurance Premium that is equivalent to ½ of 1% based on the outstanding balance of the mortgage loan.
- Third-party charges – these closing costs are typically charged by title companies, surveyors, appraisers, recording fees, and/or credit checks.
- Origination Fees – lenders typically charge a fee for processing the reverse mortgage. According to HUD, a lender can charge the larger of:
- $2,500, or
- 2% of the first $200K of your home’s value, plus 1% of any amount over $200K. Note, however, that HECM origination fees are maxed out at $6,000.
- Servicing Fees – servicing of mortgages requires tremendous amounts of paperwork, which includes loan disbursements, plus the verification of taxes and insurance. Servicing fees may be charged each month or reflected in the interest rate. If charged monthly, servicing fees are capped as follows:
- $30 per month for fixed-rate or annual adjusting interest rates.
- $35 per month for interest rates that adjust every month.
What Happens Upon the Death of the HECM Borrower?
When the HECM borrower passes, the reverse mortgage’s outstanding balance becomes payable and due upon their death. If there is a surviving nonborrowing spouse, certain provisions prevail. First, though, a surviving non-borrower spouse is defined as the spouse of the HECM borrower, who was not named as a borrower when securing the reverse mortgage. A spouse may be intentionally omitted from a reverse mortgage application for several reasons that include:
- The younger spouse was not yet 62 years old.
- The spouse was not on the property’s title when the reverse mortgage was closed.
Upon the death of the HECM borrower, the nonborrowing spouse is not permitted to withdraw any of the unused funds, but note, premiums for mortgage insurance and service fees continue to accumulate until the outstanding balance of the reverse mortgage has been paid in full.
Upon the passing of the HECM borrower, their non-borrowing spouse can opt to repay the reverse mortgage and retain the property for the lesser of –
- The unpaid principal balance or
- 95 percent of the property’s appraised value
If the reverse mortgage was applied for on or after August 2014, a nonborrowing spouse might have the potential of remaining in the property after the death of their spouse if they meet the required qualifying attributes. These include:
- The surviving spouse was identified as a nonborrowing spouse at the application.
- A non-borrowing spouse was legally married at the loan closing.
- The surviving spouse must reside in the subject property of the HECM.
- The surviving spouse must have or obtain the legal right/marketable title to the property.
- The surviving spouse agrees to maintain the property to FHA standards, among others.