FHA Reverse Mortgage Options

To qualify for a HECM, at least one borrower must be 62 years or older at the time of closing, as this is a legal requirement with no exceptions. If both individuals on the title of the home are 62 or older, both will be considered borrowers, regardless of whether they are married. The younger borrower’s age is used to calculate the loan amount and life expectancy.

In cases where there is a younger spouse living in the home, that individual is classified as a non-borrowing spouse. Non-borrowing spouses may be able to postpone the loan repayment for as long as they live in the home, provided they meet specific conditions.

Eligible property types for a HECM include single-family residences (SFR), townhomes, condos (with specific restrictions), manufactured homes (with specific restrictions), and 2-4 unit properties. The property must be owner-occupied, regardless of the type.

For condos, they must be FHA-approved, either through a complex-level approval or a single-unit approval process. Manufactured homes must be located on owned land (no rental communities), built after 1976, and must be placed on a single property with the tongue and axle removed. Co-ops are not eligible for a HECM at this time.

HECM interest rates are typically adjustable, similar to a home equity line of credit (HELOC) offered by banks. However, instead of using the prime index like HELOCs, these loans are based on the treasury index. While fixed-rate loans are available, they are rarely used for various reasons. In the reverse mortgage industry, interest rates are not locked in.

We don't post interest rates on our website because they fluctuate every Tuesday and can be influenced by secondary market conditions, which can change daily. When we provide a proposal, we will outline the initial interest rate, expected interest rate, and the rate cap for you.

The loan-to-value (LTV) ratio is determined by HUD and may change periodically. Three key factors affect the loan amount: the youngest borrower’s age or the age of the non-borrowing spouse, the home’s appraised value, and the expected interest rate. Since most HECMs have an adjustable rate, the expected interest rate plays a more significant role than the starting rate. As a result, the LTV can vary significantly from year to year depending on the expected rate at the time of application.

The lending limit set by HUD is more of a cap on the home value used to calculate the LTV rather than an actual lending limit. This cap has increased over the years, from a maximum of $362K in the early 2000s to over $1M today. For example, if the lending limit is $1M and your home is valued at $5M, your LTV will be based on the $1M limit.

All reverse mortgages are non-recourse loans, meaning you cannot owe more than the value of the home.

Adjustable-rate reverse mortgages offer several ways to access the funds, including lump sum, line of credit, term, and tenure options. Lump sums have certain limitations, as outlined in the upfront draw limitation section. Term and tenure are monthly payment options, with term offering a fixed number of months or a specified monthly payment amount, while tenure provides a lifetime monthly payment based on life expectancy for as long as the borrower remains in the home. It's common for borrowers to combine payment options, such as taking a partial lump sum along with a line of credit or a partial lump sum and tenure payments.

In contrast, fixed-rate reverse mortgages require the funds to be distributed as a lump sum, which may conflict with the upfront draw limitations described below. As a result, fixed rates are typically used for paying off large mortgages or for a HECM for purchase loan.

One of the key advantages of the HECM is the line of credit growth rate, which compounds monthly at 1/12th of the interest rate plus the ongoing MIP rate. As the interest rate increases, the growth rate of the line of credit also rises. For example, with a 5% growth rate, the line of credit will double in 14 years if unused, and in just 10 years if the growth rate reaches 7%.

Unlike a HELOC, the reverse mortgage line of credit is guaranteed. A HELOC can be frozen, reduced, or canceled at any time, often with a teaser payment followed by a balloon payment. However, a reverse mortgage line of credit cannot be frozen, reduced, or canceled as long as the borrower meets the loan requirements, which include living in the property as the primary residence, not being absent for more than 12 months consecutively, and staying current on property charges.

All FHA loans, including both reverse mortgages and 30-year fixed loans, come with two types of mortgage insurance charges: an upfront premium and an ongoing insurance fee. For reverse mortgages, the upfront charge is 2% of the home’s value or the lending limit, whichever is lower. In the past, there were instances where a lower upfront charge was applied with a higher ongoing rate.

The ongoing mortgage insurance premium (MIP) is 0.5% annually, compounded monthly (one twelfth of 0.5%), and is added to the interest. Larger loan balances accrue more mortgage insurance than smaller ones. The purpose of mortgage insurance is to mitigate the risks associated with negative amortization loans, where the loan balance can grow larger than the home’s value due to compounding interest, home depreciation, and property wear. In such cases, if the loan balance exceeds the home value upon sale, FHA covers the difference, protecting the lender. Without FHA insurance, reverse mortgage interest rates would be much higher, as lenders face greater risks, which is why non-FHA reverse mortgages have largely disappeared over time. While the FHA insurance premiums may seem high, they play a crucial role in maintaining the stability of the program.

If your home debt is between 0% and 50% of the gross loan amount being offered, you can access up to 60% of the loan amount in cash at closing, after deducting any closing costs and payoffs, such as an existing mortgage. The remaining funds will be placed on a line of credit for 12 months before you can access them fully.

If your home debt is between 51% and 89% of the gross loan amount, you can access 10% of the loan amount in cash at closing, with the rest available on a line of credit after 12 months. If your home debt is 90% or more of the gross loan amount, you can fully access the reverse mortgage at closing.

There is no obligation to take cash at closing, and you can choose to leave all the proceeds in a line of credit. HUD introduced this policy in 2013 to prevent loans from being fully drawn at closing. The goal was to offer gradual funding over an extended period, rather than providing a lump sum upfront.