Many American seniors still own their homes during their retirement. To them, it’s no longer just a house. It has become a priceless possession.
Little do they know that the very structure they live is a source of wealth just waiting to be discovered.
All those payments towards the mortgage were not just for nothing. Because you have faithfully done your part as a responsible homeowner and borrower, you have built a substantial amount home equity. This equity is the treasure you can use to your advantage.
There is a refinance product specially designed for qualified seniors that enable them to tap into their property’s equity in order to draw out cash. However, this is not the best part.
What makes this different from other refinancing programs in the market is that there is no need to pay the lenders every month.
Home Equity Conversion Mortgage
The Home Equity Conversion Mortgage or HECM is a reverse mortgage program guaranteed by the Federal Housing Administration (FHA). This program targets senior homeowners for them to be able to convert a part of their home equity into readily-usable money.
For a senior borrower to qualify for an HECM loan, he/she must meet the following criteria:
- The senior must be 62 years old or above
- The house should be the primary residence of the senior
- The property must be own by the borrower outright or it must be paid down considerably
- The home can be a single unit or multi-family unit of up to four units. However, one unit must be occupied by the borrowing senior.
- The borrower must be current on his/her debts and federal taxes
- The residence must meet the FHA standards.
In addition, it is required by the FHA that the senior undergo a financial assessment and receive HECM counseling. These two actions are aimed to aid the borrower in assessing if a reverse mortgage is truly for him/her.
To make sure that the homeowner has enough money to keep paying the property taxes and insurance, association fees and other debts for the entire loan term, the financial assessment is performed.
To do this, the senior’s income and assets, as well as the credit history are verified. The lender will also have to review the borrower’s recurring expenses including debts. The financial assessment will also look into the payments done on property taxes and insurances. It has to find out if these have been paid on time.
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Why is a HECM Counseling Required?
The loan process begins with a reverse mortgage loan counseling. During the counseling, the senior borrower is educated with everything there is to know about the HECM program.
It will be conducted by an FHA-approved HECM counselor. The counselor will discuss the pros and cons of having this loan. The course will also include how much this loan costs and the tax implications connected with it.
In addition, the counselor will ask the borrower the reasons of applying for the loan. Based on this, the counselor will make suggestions and recommendations if he/she finds out that there are other fund sources that are more beneficial than the HECM.
In the end, will still be the senior’s decision if he/she pushes through with the reverse mortgage application. The HECM counseling is just there to ensure that the borrower makes well-informed decision.
When Does the Reverse Mortgage Loan Become Due?
So long as the senior lives in the property, the loan does not become due for payment. However, when they decide to sell the house, move out or if the borrower dies, the loan then becomes payable.
How Does the Borrower Get the Funds?
Once the loan is approved, there are several ways to disburse the money to the homeowner. Payment plans can be one or a combination of these methods:
- A monthly fixed rate
- A line of credit, where the borrower can take as much or as little money until the total funds are exhausted.
- A one-time lump sum, given at the closing
Note that if you have questions about these fund disbursement methods, you can always ask the lender at about it at any point of the loan process. However, the counselor will include this in the discussion during the HECM counseling.
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Where can the funds be used for?
There is no limit to where the funds can go. This upon the borrower’s discretion. It can be used towards emergency medical expense, cover utility costs, supplement existing funds for prescription drugs or even the purchase of an investment property.
With this much freedom, it is easy to just spend the money for unprofitable things. It is best to use the funds to cover the rainy days or to invest it and earn more.
The Home Equity Conversion Mortgage is a very useful loan product for borrowers during retirement. It is important to know more about it. Speak with a lender who offers the FHA reverse mortgage program. Getting first-hand information about the program will help you decide if it is the right financing for you.