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The Federal Housing Administration (FHA) is the federal agency that insures many reverse mortgages. If you meet certain requirements, you can get some of your home equity in the form of a lump sum, monthly payments, or a line of credit. Here is how FHA reverse mortgage loans work.
The Federal Housing Administration (FHA), part of the U.S. Department of Housing and Urban Development (HUD), provides insurance for a type of reverse mortgage known as a home equity conversion mortgage (HECM). The insurance protects the lender in case the borrower defaults on the loan.
HECMs are the most common reverse mortgages today. Like other reverse mortgages, they allow homeowners to tap the equity that has accumulated in their homes over the years without having to sell the home. The homeowner can take the money in the form of a lump sum, a series of monthly payments, or a line of credit.
Unlike with a regular mortgage, the homeowner doesn’t have to make payments until they eventually sell the home, move out, or die. Instead, the amount that they owe accumulates over time, and the loan is paid off either when the home is finally sold or by the homeowner’s heirs if they wish to keep it.
To qualify for an HECM insured by the FHA, the homeowner must:
The homeowner must also participate in an information session with a HUD-approved counselor to determine whether an HECM is right for them.
The applicant’s home also needs to satisfy certain FHA requirements. Specifically, it must be:
In addition, the home must meet HUD property standards and flood requirements. During the home appraisal process for the loan, the lender’s appraiser, who must be HUD-approved, will evaluate whether the home meets those requirements or requires repairs or other improvements.
Reverse mortgage lenders generally require at least 50% equity in the home.
HECMs can be either fixed-rate or variable-rate loans. In the case of a fixed-rate loan, the borrower must take the money as a lump sum.
A variable-rate HECM can provide income in the form of monthly payments, a line of credit for the homeowner to draw on as they choose, or some combination of the two.
Although the FHA insures HECMs, it does not issue them. Instead, they are issued by FHA-approved lenders, including banks and credit unions. HUD has a search tool on its website that borrowers can use to find approved lenders in their area.
Like other types of mortgages, HECMs can have a long list of closing costs and other fees. Those can include:
Mortgage insurance premiums: The borrower must pay an initial, one-time premium for the FHA insurance equal to 2% of the loan amount. After that, the premium is 0.5% of the outstanding loan balance annually. Because the balance on a reverse mortgage grows every year, those premiums will grow as well.
Origination fee: This is a fee that goes to the lender at closing. It will be $2,500 or 2% of the first $200,000 of the home’s value (whichever is greater) plus 1% of the amount over $200,000. By law, HECM origination fees can’t exceed $6,000.
Servicing fees: The loan servicer, which handles loan disbursements, account statements, and other ongoing tasks associated with the mortgage, can charge either $30 or $35 a month, depending on the type of HECM.
Other closing costs: The borrower also may have to pay appraisal, inspection, title search, and recording fees, among others.
Many of these fees can vary from lender to lender, so borrowers should try to shop around.
HECMs are not the only reverse mortgages that are available. Some lenders offer their own proprietary reverse mortgages. These loans are not government-insured but can have higher lending limits than the FHA’s current HECM limit of $1,149,825.
Another type of reverse mortgage is the single-purpose reverse mortgage. State and local agencies and some nonprofit organizations issue these loans to low- and moderate-income homeowners. As their name suggests, the proceeds must be used for a specific purpose, such as home repairs or paying property taxes.
The amount that you can borrow with a reverse mortgage will depend on the market value of your home, your age, and current interest rates. Government-insured reverse mortgages are capped at a maximum of $1,149,825, but some lenders offer larger loans.
No. The U.S. Department of Veterans Affairs (VA) doesn’t have a reverse mortgage program.
That depends on your relationship with the borrower. Non-spouses who inherit a home have to pay off the reverse mortgage, either by selling the home or with their own funds if they wish to keep it. To do so, they must pay the lender the full loan balance or 95% of the home’s appraised value, whichever is less. In the latter case, Federal Housing Administration (FHA) insurance makes up the difference to the lender.
Spouses can often remain in the home for the rest of their lives, but the rules are complicated and depend on whether they were co-borrowers on the loan or non-borrowing spouses. Anyone, spouse or otherwise, who inherits a home with a reverse mortgage should contact the loan servicer and/or a U.S. Department of Housing and Urban Development (HUD)-approved housing counselor as soon as possible after the borrower’s death to find out what steps they need to take and what the deadlines are.
FHA reverse mortgage loans, formally known as home equity conversion mortgages (HECMs), are the most common type of reverse mortgage. HECMs are insured by the government to protect lenders in case the borrower defaults on the mortgage. To be eligible for an HECM, the borrower must meet certain requirements, including a session with a housing counselor to make sure that a reverse mortgage is appropriate for them.
