What is a HECM Loan?

HECM loans are the most popular type of reverse mortgage. They’re the only reverse mortgage insured by the federal government, and consequently, they’re only available through Federal Housing Authority (FHA)-approved lenders.

According to the U.S. Department of Housing and Urban Development (HUD), the amount of cash you can get under a HECM mortgage varies by borrower and is based on 1) the youngest borrower’s age or the age of an eligible non-borrowing spouse, 2) current interest rates, and 3) the home’s appraised value up to the current FHA lending limit of $1,089,300 (2023).

These funds can be used however the borrowers choose. Common uses include supplementing income, saving for retirement, vacationing, repairing or improving their property, or paying for medical expenses.

What’s the Difference Between a HECM and a Reverse Mortgage?

A HECM is a type of reverse mortgage, but all reverse mortgages are not HECMs. The most significant difference is that a HECM is issued by an FHA-approved lender and federally insured to protect benefits like:

The ability to choose a fixed or adjustable rate
The option to choose how you want to receive your proceeds, such as a line of credit, lump sum, monthly payments, or a combination thereof. How Can You Receive Your Money with a HECM?
The fact that HECMs are non-recourse loans, which means you — and perhaps most importantly, your heirs — cannot owe more than your home is worth even if the home loses value due to an economic downturn
The ability to continue accessing funds throughout the life of the loan

It is important to discuss these aspects of the program with whichever lender you choose to understand the stipulations and details of these programs.

Prefer to speak with an expert about whether a HECM is right for your situation?

How Does a Home Equity Conversion Mortgage Work?

When tapping into your home’s equity through a HECM, you won’t have access to all of it. Instead, how much you have access to depends on your age and the appraised value of your home.

Unlike a forward mortgage, there’s no minimum FICO score to qualify for a HECM reverse mortgage. However, the lender will still verify your income, assets, monthly living expenses, and credit history to determine your eligibility and ensure that you meet the basic criteria of the financial assessment that is required by HUD.

Once approved, the lender will use the funds from the reverse mortgage to pay off your current mortgage balance, federal judgements, and any liens on the home first. In the first year of a HECM, you are only able to access a portion of your loan amount, but you will be able to access the rest after the first anniversary of the HECM closing date.

Are All Reverse Mortgages Backed by HUD?

There are several kinds of reverse mortgages available to those nearing retirement age, but a HECM is the only option that’s federally insured by the Federal Housing Administration which is overseen by HUD.

HECM Requirements

HECM Borrower Requirements

To qualify for a HECM, you’ll need to meet the following criteria:

All borrowers must be at least 62 years old. In most states, spouses who are not yet 62 can be on the loan as non-borrowing spouses. This allows them to remain in the home if the borrower passes away first. However, non-borrowing spouses will not have access to the line of credit or monthly payments established by the program unless they refinance the reverse mortgage and become borrowers themselves.
You must occupy the dwelling as your primary residence.
You should own your home outright or have at least 50% equity.
You cannot be past due on any federal debt.
You must continue paying ongoing property expenses such as taxes, home owner’s insurance, home owner association (HOA) dues, and costs associated with maintaining your property.
You will need to attend a counseling session provided by a HUD-approved HECM counselor.

HECM Property Requirements

In addition to personal criteria, your dwelling must meet different requirements to be eligible for a HECM. These include:

Single-family homes
Two to four-unit dwellings, as long as the owner occupies at least one unit
HUD-approved condominium projects and individual condos
Townhouses
Manufactured homes built after June 1976
Homes in a planned unit development (PUD)
Properties held in a living trust

How Do I Apply for a HECM?

Here’s how the HECM application process works:

Make sure that you meet all the requirements for a reverse mortgage.
Reach out to a Reverse Mortgage Specialist to complete a loan application. You can search online or speak to your HECM counselor, who will provide a list of approved lenders.
Attend a counseling session with a third-party counselor. You must complete this requirement before your application can move forward.
Undergo an appraisal to establish the legal value of your property.
Underwriting occurs, which includes a title search, title insurance, and verifying your financials.
Once your reverse mortgage has been approved, you will be assigned a closing date. You’ll sign all necessary documents at closing, and the title company will issue you a check if proceeds are available.

HECM Financial FAQs

What Interest Rates Come with a HECM?

Depending on the product you select, the initial interest rate can be fixed or adjustable, although they’re often similar to conventional interest rates. We recommend reaching out to a Reverse Mortgage Specialist to review current market rates.

What Costs are Associated with a HECM?

Just like with a traditional forward mortgage, there are closing costs associated with a reverse mortgage. Many of these closing costs can be incorporated into a reverse mortgage; however, this will decrease the amount of loan proceeds available to borrowers upon closing their loan. Here are some of the most common costs you can encounter with a HECM:

Mortgage insurance premiums (MIP) — Some products may require upfront mortgage insurance at closing. This cost is typically 2% of the loan.
Third-party charges — Typical fees include appraisals and surveys, title, inspection, taxes, and credit checks just like a conventional mortgage.
Origination fee — This fee can vary anywhere from $0 to a max of $6,000.

How Can You Receive Your Money with a HECM?

If you chose a fixed-rate option, you will only be able to receive a lump sum at closing and no further disbursements throughout the loan.

On the other hand, there are many more options to receive funds with an adjustable-rate loan, including:

Lump sum — You receive all the loan proceeds in a single payment
Tenure payment plans — Equal monthly payments
Term payment plans — Equal monthly payments that cease after a pre-determined amount of time (e.g., 10 years)
Line of credit — The borrower is only charged interest as payments are dispersed, and there’s the added benefit of the line of credit growth rate.
The amount you can get during the first 12-month disbursement period is subject to an initial disbursement limit.

Borrowers can also opt for a combination of the aforementioned options and make changes to those selections throughout the life of the loan. A licensed Loan Officer can discuss the right option for your situation.

Are you wondering if a HECM is the right reverse mortgage for you and your family? Talk with one of our reverse experts today!

Guild Mortgage, LLC NMLS #3274. Equal housing opportunity. This material is not from HUD or FHA, nor was this approved, endorsed by, or on behalf of any Government Agency. For licensing see www.nmlsconsumeraccess.org.

HECM Reverse Mortgages: How Do They Work?