Reverse Mortgages (HECM) Overview

Reverse Mortgages (HECM)

• Designed for senior citizens to access home equity without monthly payments.
• Offered and serviced by specialized lenders.
• Primarily through the FHA HECM program.
• Secondary market exists with Ginnie Mae guaranteeing mortgage-backed securities.
• Loan amount depends on equity, not credit or income.
• Negative amortization: unpaid interest added to the principal.
• Loan proceeds: single lump sum, scheduled payments, or line of credit.
• Borrowers typically retain 50% equity.
• Loan amount calculation considers:
  • Age of youngest borrower/spouse
  • Interest rate
  • Appraised value
  • FHA mortgage limit (or lender limit)
  • Sales price (if a purchase).
• Loan repayment triggered by:
  • Death of last surviving borrower/spouse
  • Sale of the home
  • Home no longer used as a primary residence.
• Lender can demand full repayment for missed property taxes/insurance or lack of property maintenance.
• Full balance (interest, insurance, fees) due upon repayment.
• Remaining equity belongs to borrower/estate.
• Lender writes off unpaid balance if home value cannot cover loan.
• Requirements:
  • Borrower aged 62 or older.
  • Eligible co-borrower spouses allowed.
  • Properties: single-family homes, condos, planned unit developments.
  • Home must be the borrower's primary residence.
  • Homeowner's insurance at replacement value.
  • Pre-loan counseling required.
  • Title insurance covers loan amount (initial and future due to negative amortization).
• Exempted from TRID (Loan Estimate/Closing Disclosure).
• Disclosures required:
  • Notice that the applicant isn't obligated to proceed.
  • Good Faith Estimate (GFE) with projected costs & TALC.
  • Itemized terms, charges, borrower's age, and appraised value.
  • TALC explanation (Reg Z, Appendix K, paragraph (d)).
• Costs:
  • Upfront at closing (cash or from loan proceeds).
  • Lender origination fees (maximum $6,000).
  • Closing costs (appraisal, title search, etc.).
  • Initial and annual mortgage insurance premiums (different from homeowner's insurance).
  • Ongoing: interest, lender servicing fees, annual mortgage insurance premium (0.5% of outstanding balance).
• Advertising restrictions:
  • No deceptive or inaccurate marketing materials.
  • Cannot claim FHA/HUD approval or use logos/symbols.
  • Cannot imply risk-free income solution.

Home Equity Lines of Credit (HELOC)

• Open-ended second mortgage with a credit limit for borrowing.
• Two phases: draw period and repayment period.
• Draw period: borrowing, interest-only or small principal payments.
• Repayment period: line of credit closes, full repayment by maturity date.
• Loan disbursement methods: online transfer, checks, connected credit cards.
• Few to no closing costs.
• Typically variable interest rates.
• Loan amounts based on property value and creditworthiness.
• Draw period: interest/payments are based on average daily balance.

Purchase Money Second Mortgage (PM2)

• Second mortgage issued concurrently with a first mortgage (piggyback second).
• Allows buyers with less than 20% down payment to avoid PMI.
• Combined Loan-to-Value ratio (CLTV) calculated: first and second mortgages divided by the lower of sale price or appraised value.
• Common structure (80/10/10).
• No prepayment penalty.
• Subject to secondary market guidelines based on borrower qualifications.

Balloon Mortgage

• Larger payment than average monthly payment at the end of the loan term.
• Potential for large balloon payment, often high percentage of original principal.
• Example: 7-year balloon with 30-year amortization schedule.
• Generally not considered Qualified Mortgages (QM).
• Popular before 2007 crisis; purchased by GSEs.
• Often offered lower interest rates than 30-year fixed-rate loans.

Interest-Only Mortgage

• Interest payments only initially, with principal payback later.
• Not considered Qualified Mortgages.
• May be available as a Non-QM product.
• Common structure: interest-only for initial set period, followed by full principal and interest payments until maturity date.
• Options: interest-only fixed-rate or adjustable-rate mortgages (ARM).

Construction Loan

• Finances construction of improvements on land.
• Short-term loan, paid off with a permanent loan upon completion.
• Disbursed in installments (draws) based on scheduled construction milestones.
• Interest is only on disbursed amounts during construction period.
• Permanent financing must be approved beforehand.

Construction-Permanent Loan

• Combined construction and permanent financing.
• Funds disbursed to borrower/builder in stages, with payment after completion.
• Lender reviews plans and construction progress.
• Disbursement methods: draw schedule plan, voucher systems, warrant systems.
• TRID rule applies, requiring accurate disclosure.
• Separate Loan Estimates and Closing Disclosures are optional (either combined or individual for construction/permanent phases).
• Estimating disclosures for periodic payments during construction, using Reg Z Appendix D.
• Disclosures can (and often must be) revised if the permanent financing settlement occurs more than 60 days after the original Loan Estimate.

This quiz covers the essentials of Home Equity Conversion Mortgages (HECM), a financial tool designed for seniors to access their home equity. Learn about eligibility, loan repayment triggers, and the impact on home equity while understanding important terms like negative amortization and loan calculations.