The Federal Housing Administration (FHA) is the federal agency that insures many reverse mortgages. Here is how FHA reverse mortgage loans work.
Key Takeaways
- The Federal Housing Administration (FHA) insures the most common type of reverse mortgage, known as a home equity conversion mortgage (HECM).
- HECMs are offered only through FHA-approved lenders.
- Borrowers who meet the requirements can receive a portion of their home equity in the form of a lump sum, monthly payments, or a line of credit.
- Other types of reverse mortgages include proprietary reverse mortgages and single-purpose reverse mortgages.
What Is an FHA Reverse Mortgage Loan?
The FHA, part of the U.S. Department of Housing and Urban Development (HUD), provides insurance for a type of reverse mortgage known as a home equity conversion mortgage (HECM). The insurance protects the lender in case the borrower defaults on the loan.
HECMs are the most common reverse mortgages today. Like other reverse mortgages, they allow homeowners to tap the equity that has accumulated in their homes over the years without having to sell the home. The homeowner can take the money in the form of a lump sum, a series of monthly payments, or a line of credit.
Unlike regular mortgages, the homeowner doesn’t have to make payments until they eventually sell the home, move out, or die. Instead, the amount that they owe accumulates over time, and the loan is paid off either when the home is finally sold or by the homeowner’s heirs if they wish to keep it.
Who Is Eligible for an FHA Reverse Mortgage Loan?
To qualify for an HECM insured by the FHA, the homeowner must:
- Be at least age 62
- Have paid off their home or at least a substantial portion of it
- Occupy the home full time as their primary residence
- Not be delinquent on any federal debt
- Have adequate financial resources to cover future property taxes, homeowners insurance premiums, and any other required fees
The homeowner must also participate in an information session with a HUD-approved counselor to determine whether an HECM is right for them.
What Types of Homes Are Eligible for FHA Reverse Mortgage Loans?
The applicant’s home also needs to satisfy certain FHA requirements. Specifically, it must be:
- A single-family home or a two- to four-unit home with one unit occupied by the borrower
- A HUD-approved condominium project
- An individual condominium unit that meets FHA requirements
- A manufactured home that meets FHA requirements
In addition, the home must meet HUD property standards and flood requirements. During the home appraisal process for the loan, the lender’s appraiser, who must be HUD-approved, will evaluate whether the home meets those requirements or requires repairs or other improvements.
Reverse mortgage lenders generally require at least 50% equity in the home.
Types of FHA Reverse Mortgage Loans
HECMs can be either fixed-rate or variable-rate loans. In the case of a fixed-rate loan, the borrower must take the money as a lump sum.
A variable-rate HECM can provide income in the form of monthly payments, a line of credit for the homeowner to draw on as they choose, or some combination of the two.
Where To Get an FHA Reverse Mortgage Loan
Although the FHA insures HECMs, it does not issue them. Instead, they are issued by FHA-approved lenders, including banks and credit unions. HUD has a search tool on its website that borrowers can use to find approved lenders in their area.
FHA Reverse Mortgage Loan Costs
Like other types of mortgages, HECMs can have a long list of closing costs and other fees. Those can include:
Mortgage insurance premiums. The borrower must pay an initial, one-time premium for the FHA insurance equal to 2% of the loan amount. After that, the premium is 0.5% of the outstanding loan balance annually. Because the balance on a reverse mortgage grows every year, those premiums will grow as well.
Origination fee. This is a fee that goes to the lender at closing. It will be $2,500 or 2% of the first $200,000 of the home’s value (whichever is greater) plus 1% of the amount over $200,000. By law, HECM origination fees can’t exceed $6,000.
Servicing fees. The loan servicer, which handles loan disbursements, account statements, and other ongoing tasks associated with the mortgage, can charge either $30 or $35 a month, depending on the type of HECM.
Other closing costs. The borrower also may have to pay appraisal, inspection, title search, and recording fees, among others.
Many of these fees can vary from lender to lender, so borrowers should try to shop around.
Alternatives to FHA Reverse Mortgage Loans
HECMs are not the only reverse mortgages that are available. Some lenders offer their own proprietary reverse mortgages. These loans are not government-insured but can have higher lending limits than the FHA’s current HECM limit of $970,800.
Another type of reverse mortgage is the single-purpose reverse mortgage. These loans are issued to low- and moderate-income homeowners by state and local agencies and some nonprofit organizations. As their name suggests, the proceeds must be used for a specific purpose, such as home repairs or paying property taxes.
How much can you borrow with a reverse mortgage?
The amount that you can borrow with a reverse mortgage will depend on the market value of your home, your age, and current interest rates. Government-insured reverse mortgages are capped at a maximum of $970,800, but some lenders offer larger loans.
Does the U.S. Department of Veterans Affairs (VA) offer reverse mortgages?
What happens if you inherit a home with a reverse mortgage?
That depends on your relationship to the borrower. Non-spouses who inherit a home have to pay off the reverse mortgage, either by selling the home or with their own funds if they wish to keep it. To do so, they must pay the lender the full loan balance or 95% of the home’s appraised value, whichever is less. In the latter case, Federal Housing Administration (FHA) insurance makes up the difference to the lender.
Spouses can often remain in the home for the rest of their lives, but the rules are complicated and depend on whether they were co-borrowers on the loan or non-borrowing spouses. Anyone, spouse or otherwise, who inherits a home with a reverse mortgage should contact the loan servicer and/or a U.S. Department of Housing and Urban Development (HUD)-approved housing counselor as soon as possible after the borrower’s death to find out what steps they need to take and what the deadlines are.
The Bottom Line
FHA reverse mortgage loans, formally known as home equity conversion mortgages (HECMs), are the most common type of reverse mortgage. HECMs are insured by the government to protect lenders in case the borrower defaults on the mortgage. To be eligible for an HECM, the borrower must meet certain requirements, including a session with a housing counselor to make sure that a reverse mortgage is appropriate for them.