HUD & FHA Reverse Mortgage Guidelines and Rules

guidelines of a reverse mortgage loan
By: Nathan Grant · 
February 28, 2020
Is a HECM loan right for you? Let us help you decide. At GoodLife, we’re proud to provide you with the information you need to move confidently into your future. If you’d like to know more about this alternative financing solution, click on a link below to learn about the different governmental rules and reverse mortgage guidelines. Armed with comprehensive information, you can rest assured that you’re making the best choice in not only the present but for years to come.

General HECM Rules & Guidelines

A reverse mortgage is also known as a Home Equity Conversion Mortgage (HECM). The reverse mortgage program is popular among homeowners 62 and older who would like to supplement their retirement income. This type of loan is insured by the government through the Federal Housing Administration (FHA) and is regulated under FHA reverse mortgage guidelines. The HECM program (Section 255) allows eligible borrowers to convert the equity in their homes into a monthly stream of income or available line of credit. Find out how much you qualify for with our free reverse mortgage calculator. Unlike traditional loans, reverse mortgages defer all loan and interest payments until the loan matures. Until then, spendable funds can be used for a wide variety of purposes, including everything from travel to home renovations, and may significantly improve the borrower’s quality of life throughout their Golden Years with a more comfortable retirement. The reverse mortgage guidelines for proprietary loans from private lenders will most likely differ from a HECM, which is insured by the government through the U.S. Department of Housing and Urban Development (HUD). True to all government-sponsored loans, the HUD reverse mortgage guidelines are highly regulated with rules in place to protect both borrowers and lenders.

Rules for Borrowers

HECM guidelines and safeguards for borrowers include:
  • Borrowers must be at least 62 years old and occupy the home as their primary residence.
  • Borrowers must own the home and have a significant amount of equity in the property.
  • The borrower may not be delinquent on any federal debt, and there must not be any existing lien on the property.
  • The borrower must prove they can afford to live in their home if the reverse mortgage is approved.
  • Before a borrower may receive a HECM, they must complete a government-approved counselling session that goes over the HUD reverse mortgage guidelines, eligibility requirements, and financial implications. You can search for a HECM counselor online or by calling toll-free at (800)569-4287.
  • After receiving a reverse mortgage, the borrower will retain ownership over the property and may sell the home to move at any time he or she would like, keeping the sales proceeds in excess of the mortgage balance.
  • The borrower may choose between five different payment options:
  1. Tenure (the borrower receives monthly payments from the lender for as long as the borrower lives and continues to occupy the home as a primary residence)
  2. Term (the borrower sets a fixed period of time through which they will receive monthly payments)
  3. Line of Credit (the borrower can make withdrawals up to a maximum amount as opposed to one Lump Sum)
  4. Modified Tenure (in which the tenure option is combined with a line of credit)
  5. Modified Term (in which the term option is combined with a line of credit)
  • FHA reverse mortgage guidelines state that the loan need not be repaid until the borrower moves, sells, or dies, at which point the loan matures.
  • If the loan exceeds the value of the property at the time it becomes due and payable, the borrower (or their heirs) will owe no more than the actual value of the property.

Rules for Lenders

Both borrowers and lenders are protected by HUD reverse mortgage guidelines, which state:
  1. Origination Fee (this fee is capped at $6,000 and regulated by the government with the formula of 2% of the first $200,000 in property value plus 1% of the remaining value above $200,000; however, lenders are not required to charge the full origination fee and may offer reduced amounts or rebates)
  2. Mortgage Insurance Premium or “MIP” (2% of the property value is paid to the FHA per HECM guidelines in order to cover the government protection given to borrowers)
  3. Third Party Fees (individual smaller fees are paid out to third parties for appraisal, inspection, title, and so forth)
  • Lenders may also charge either fixed or adjustable interest rates on the principal balance of the loan. Fixed interest rates are determined by the lender and do not change during the life of the loan; adjustable rates are based on a financial index (published by the London Interbank Offered Rate) plus a margin.
  • Lenders are required to complete a financial assessment on all prospective borrowers to ensure their ability to taxes and insurance alongside their current financial obligations.
  • A lender may never force a buyer to sell their home to pay off the mortgage, even if the mortgage balance grows to exceed the value of the property.
  • HUD reverse mortgage guidelines forbid lenders to ever charge more than the value of the home when it comes time to pay off the loan.
  • If the borrower dies and an “underwater mortgage” is left to heirs, a lender must offer to settle for a lower amount than the full debt, usually 95% of the total borrowed.
  • Lenders must give heirs time to decide what to do with the home before settling the debt, which is generally around six months.

Reverse Mortgage Income Requirements & Guidelines

As of April 27, 2015, HUD reverse mortgage guidelines make it mandatory for all lenders to complete a financial assessment. This assessment is designed to ensure a borrower has the financial capability to fulfill their loan obligations, while still paying for their outstanding obligations such as property taxes, home insurance, and so on. The financial assessment during the reverse mortgage application process will look at a borrower’s income, assets, monthly living expenses, credit history, and debt. Types of verifiable income include:
  • Employment income (traditional income earned by working for an employer, as documented by IRS Form W2)
  • Part-time employment income (if a borrower generally works less than 40 hours per week, this income may apply to their financial assessment if they have held the job for over two years)
  • Overtime and bonus income (this income falls outside of a borrower’s standard salary)
  • Seasonal employment income (if a borrower earns money on a seasonal basis for over two years and is reasonably likely to continue the following season, this income may be included in the financial assessment)
  • Other considerations (income received through disability, Social Security, VA benefits, rental properties, commission, etc.)
Per HECM guidelines, borrowers must also demonstrate positive credit history and may not have outstanding federal debt. If you apply for a reverse mortgage but your assessment ratio shows that you may find it difficult to meet financial obligations, you may be able to set aside money from your loan funds to pay for taxes, homeowner’s insurance, and other expenses.

Reverse Mortgage Appraisal Guidelines

When you apply for a reverse mortgage loan, your house must be appraised by a third party. According to HUD reverse mortgage guidelines, the amount you may borrow will depend on the lesser of this appraised value and the FHA mortgage limit of $765,600 (as of January 1, 2020), in addition to your age and the current interest rate. During the appraisal, an inspection must confirm that the home meets HUD standards as established by HECM guidelines, including:
  • No signs of lead-based paint
  • Safe and potable water
  • Sanitary facilities with a safe method of sewage disposal
  • Domestic hot water
  • Electricity
The property must be free of health and safety hazards to qualify for a reverse mortgage. The appraiser must note and require repair of items to meet HUD standards in their report, and these repairs typically must be completed before FHA can provide HECM insurance.

Reverse Mortgage Restrictions

In order to prevent defaults on HECM loans, the government includes restrictions within FHA reverse mortgage rules. These rules include a limit on how much a borrower can take out in the first year, and also a required set-aside account if there’s a possibility the homeowner won’t be able to keep up with loan obligations, such as property taxes and insurance costs. Prior to 2013, borrowers could take out 100% of the principal limit all at once in one lump sum. Now, reverse mortgage guidelines state that in the first year of the loan, a borrower may take:
  • the greater of 60% of the approved loan amount, or
  • the sum of the mandatory obligations (existing mortgages and property liens), plus 10% of the principal limit
Per reverse mortgage guidelines, the HECM borrower is responsible for paying certain items in addition to the upfront loan costs, including:
  • hazard insurance premiums
  • property taxes
The lender’s financial assessment may determine the need for a “set-aside” account, in which a portion of the loaned money is retained by the lender in order to pay taxes and insurance in upcoming years.

Reverse Mortgage for Purchase Guidelines

Senior homeowners may use the HECM for purchase program in order to purchase a new principal residence without required monthly mortgage payments with HECM program (Section 255) proceeds. According to HUD, the program was designed to “enable senior homeowners to relocate to other geographical areas to be closer to family members or downsize to homes that meet their physical needs, i.e., handrails, one level properties, ramps, wider doorways, etc.” The general HECM for purchase guidelines state:
  • The borrower must live in the home as their primary residence, continue to pay required taxes, and maintain the home according to FHA reverse mortgage rules.
  • Eligible properties for purchase include one- to four-unit properties where construction has been completed and the property is habitable.
  • The amount of money a borrower may receive is based on the youngest borrower on the title (or eligible non-borrowing spouse), current interest rates, the appraised value of the home, sale price, and lending limit.
  • Allowable funding sources include the borrower’s own money (or money obtained from the sale of assets) and withdrawals from the borrower’s savings or retirement account.
  • Lenders will be required to verify the source of funds prior to closing.
If you’re interested in a HECM for purchase and would like to know more, read through the HUD “HECM (Reverse Mortgage) for Purchase: Frequently Asked Questions” made available here. GoodLife is committed to helping you through every step of your HECM process.  If you’d like to learn more about reverse mortgage guidelines to understand whether this financing tool is a viable solution for you, contact one of our reverse mortgage experts for more information.

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