FHA/Reverse Mortgages

FHA – Federal Housing Administration

The Federal Housing Administration (FHA) was created in 1934 to insure mortgage loans on residential property and, by thus protecting lenders against loss, encourages the use of long-term mortgages with high loan-to-value ratios. The Department of Housing and Urban Development (HUD) oversees home ownership, low income housing assistance, fair housing laws, homelessness, aid for distressed neighborhoods, and housing development programs. HUD administers RESPA and FHA.

Remember FHA does not make home loans, however insures against any losses a mortgage lender will incur in case of default. In addition, FHA promotes low to moderate income earners to purchase or refinance the home with extremely favorable terms without any pre-payment penalties or exotic loan products.

 

Some other highlights of FHA programs are:

  • Rate and term refinance, 1st and 2nd lien consolidation up to 97.75% of current market value.
  • Minimal down payment requirements needed when purchasing (3.50% of the sales price is typically needed).
  • No reserves are required for qualifying purposes.
  • Down payment of funds can be a gift from a direct family member.
  • Seller can credit up to 3-6% of sales price towards buyers closing costs.
  • 640 minimum fico score required.
  • Bankruptcies must be seasoned for a minimum of two years.
  • Prior foreclosures must be seasoned for a minimum of three years.
  • Less than two years work employment is allowed.
  • Self-Employed borrowers are allowed.
  • Property must be owner occupied.
  • Property types allowed are one to four units residential.
  • Loan amounts ranging from $410K for a single family home to $788K for a 4 unit property (depending upon the county).
  • Non occupanct co-borrowers allowed.
  • FHA Loans for Association Controlled Properties (Condominiums).

FHA Condominium Loans are for anyone living or interested in purchasing in a condominium building. Condominium ownership separate owners of individual units, however allows for joint ownership of the building’s common areas and facilities. Insurance for this type of housing is provided through FHA Section 234(c). This FHA insurance is very important for low and moderate-income renters who wish to avoid the risk of being displaced when their apartments are converted into condominiums.

 

FHA Condominium Project Facts:

  • Condominium project must contain at least 4 units.
  • Condo project, including common facilities should be completed before any mortgage is insured.
  • At least 51% of the units in a project must be owner occupied or sold to owners who intend to occupy the unit (spot loans).
  • At least 80% of the units on which there are insured FHA mortgages must be owner occupied (approved projects).
  • At least 70% of total units sold before endorsement of any unit mortgage (newly constructed units and rental conversions).

 

Reverse Mortgages (HECMs) for Consumers

The Home Equity Conversion Mortgage (HECM) is FHA’s reverse mortgage program which enables you to withdraw some of the equity in your home. You choose how you want to withdraw your funds, whether in a fixed monthly amount or a line of credit or a combination of both.
You can also use a HECM to purchase a primary residence if you are able to use cash on hand to pay the difference between the HECM proceeds and the sales price plus closing costs for the property you are purchasing.
HECM counselors will discuss program eligibility requirements, financial implications and alternatives to obtaining a HECM. They will also discuss provisions for the mortgage becoming due and payable. Upon the completion of HECM counseling, you should be able to make an independent, informed decision of whether this product will meet your needs.

 

Borrower Requirements
You must:

  • Be 62 years of age or older
  • Own the property outright or have a small mortgage balance
  • Occupy the property as your principal residence
  • Not be delinquent on any federal debt
  • Participate in a consumer information session given by an approved HECM counselor

 

Mortgage Amount Based On

  • Age of the youngest borrower
  • Current interest rate
  • Lesser of appraised value or the HECM FHA mortgage limit

 

Financial Requirements

  • No income or credit qualifications are required of the borrower
  • No repayment as long as the property is your principal residence
  • Closing costs may be financed in the mortgage

 

Property Requirements

The following eligible property types must meet all FHA property standards and flood requirements:

  • Single family home or 1-4 unit home with one unit occupied by the borrower
  • HUD-approved condominium
  • Manufactured home that meets FHA requirements

 

How the Program Works

If you are a homeowner age 62 or older and have paid off your mortgage or have only a small mortgage balance remaining, and are currently living in the home, you are eligible to participate in FHA’s reverse mortgage program. The program allows you to borrow against the equity in your home. You can select from five payment plans:

  • Tenure – equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.
  • Term – equal monthly payments for a fixed period of months selected.
  • Line of Credit – unscheduled payments or in installments, at times and in an amount of your choosing until the line of credit is exhausted.
  • Modified Tenure – combination of line of credit plus scheduled monthly payments for as long as you remain in the home.
  • Modified Term – combination of line of credit plus monthly payments for a fixed period of months selected by the borrower.

You can change your payment options for a fee of $20.
Unlike ordinary home equity loans, a FHA reverse mortgage HECM does not require repayment as long as the home is your principal residence. Lenders recover their principal, plus interest, when the home is sold. The remaining value of the home goes to you or your heirs. You can never owe more than your home’s value.

If the sales proceeds are insufficient to pay the amount owed, FHA will pay the lender the amount of the shortfall. FHA collects an insurance premium from all borrowers to provide this coverage.

The amount you can borrow depends on your age, the current interest rate, other loan fees, and the appraised value of your home or FHA’s HECM mortgage limit for your area, whichever is less. Generally, the more valuable your home is, the older you are, and the lower the interest, the more you can borrow. If there is more than one owner, the age of the youngest owner is used to determine the amount you can borrow.

There are no asset or income limitations in order for you to be eligible for a HECM. In addition, there is no limit on the value of homes qualifying for a HECM. The value of your home will be determined by an appraisal. However, the amount that you may borrow is derived from the lower of the appraised value or the FHA HECM mortgage limit of $625,500. You are charged an upfront insurance premium of 2 percent of the maximum claim amount that may be borrowed plus a 0.5 percent annual premium.

 

HECM Costs

You can pay for most of the costs of a HECM by financing them and having them paid from the proceeds of the loan. Financing the costs means that you do not have to pay for them out of your pocket. On the other hand, financing the costs reduces the net loan amount available to you.
The HECM loan includes several fees, including an origination fee, closing costs, mortgage insurance premium, interest and servicing fees.

 

Origination Fee

You will pay an origination fee to compensate the lender for processing your HECM loan. A lender can charge a HECM origination fee up to $2,500 if your home is valued at less than $125,000. If your home is valued at more than $125,000 lenders can charge 2% of the first $200,000 of your home’s value plus 1% of the amount over $200,000. HECM origination fees are capped at $6,000.

 

Closing Costs

Closing costs from third parties can include an appraisal, title search and insurance, surveys, inspections, recording fees, mortgage taxes, credit checks and other fees.

 

Mortgage Insurance Premium (MIP)

You will incur a cost for HECM insurance. You can finance the mortgage insurance premium (MIP) as part of your loan. You will be charged an upfront MIP at closing which will be 2% of the lesser of your home’s value or the FHA HECM mortgage limit for your area. You will also be charged a monthly MIP that equals 0.5% of the mortgage balance.

The HECM insurance guarantees that you will receive expected loan advances and that you will not have to repay the loan for as long as you live in your home. The insurance also guarantees that, if you or your heirs sell your home to repay the loan, your total debt can never be greater than the value of your home.

 

Servicing Fee

Lenders or their agents provide servicing throughout the life of the HECM. Servicing includes sending you account statements, disbursing loan proceeds and making certain that you keep up with loan requirements such as paying taxes and insurance. HECM lenders may charge a monthly servicing fee of no more than $30 if the loan has an annually adjusting interest rate and $35 if the interest rate adjusts monthly. At loan origination, HECM lenders set aside the servicing fee and deduct the fee from your available funds. Each month the monthly servicing fee is added to your loan balance.

 

Interest Rate

HECM borrowers can choose an adjustable interest rate or a fixed rate. If you choose an adjustable interest rate, you may choose to have the interest rate adjust monthly or annually. Lenders may not adjust annually adjusted HECMs by more than 2 percentage points per year and not by more than 5 total percentage points over the life of the loan. FHA does not require interest rate caps on monthly adjusted HECMs.

 

Repaying a HECM

A HECM loan must be repaid in full when you die or sell the home. The loan also becomes due and payable if:

  • You do not pay property taxes or hazard insurance or violate other obligations.
  • You permanently move to a new principal residence.
  • You, or the last borrower, fail to live in the home for 12 months in a row. An example of this situation would be if you (or the last borrower) were to have a 12-month or longer stay in a nursing home.
  • You allow the property to deteriorate and do not make necessary repairs.