The FHA Home Equity Conversion Mortgage (HECM), also known as a Reverse Mortgage, has come a long way from its inception in 1961. It’s a rather unknown strategic retirement option and too few understand it or how much it changes lives for the better. Today it’s one of the most heavily regulated and safest retirement programs on the market.
Here are 11 consumer safeguards that ensure that the HECM is safe for you and offered by ethical and licensed professionals:
In 1987, the Federal Housing Administration (FHA) authorized federal insurance for reverse mortgages with the Housing and Community Development Act. For the borrower, this guaranteed the availability of funds. For the lender, this assured compensation when a loan balance exceeded a home’s value.
HUD mandates that an FHA Reverse Mortgage be non-recourse. This means that the home is the only collateral that can be used to pay back the Reverse mortgage, and the borrower will never owe more than the value of the home.
Required Financial Counseling
To protect the consumer, federal law requires the all potential borrowers receive pre-loan financial counseling by a HUD-approved counseling agency. HUD Counselors provide unbiased, independent facts in a neutral environment. Counselors help borrowers understand the features and costs of a reverse mortgage, independent of the lender.
“Lifetime” Tenure Reverse Mortgage
HUD devised a lifetime feature that allows a homeowner to receive monthly disbursements that span the life of the homeowner rather than a set amount of time.
The National Reverse Mortgage Lenders Association is the national voice of the reverse mortgage industry, striving to provide resources to lenders, education to consumers, and a positive experience for both. NRMLA members adhere to a strict Code of Ethics & Professional Responsibility
Limits on Rates and Fees
Congress approved recommendations to limits on rates and fees to insure there are no “excessive fees” charged to any borrower. The Federal Truth in Lending Act (TILA) requires lenders to divulge the full terms and costs of the loan, such as APR, payment terms, and any line of credit charges.
Reverse Mortgage Exams
In 2000, an exam designed to ensure that reverse mortgage counselors understand how the product operates was completed by 425 counselors in 43 states throughout the nation. This was the first official national reverse mortgage financial counseling exam designed to help counselors assist applicants in understanding the reverse mortgage product.
Economic Stimulus Act & Housing and Economic Recovery Act
In 2008, the Economic Stimulus Act increased loan amount limits for FHA mortgages, allowing borrowers in high-cost areas to utilize the FHA reverse mortgage to remain in their homes. Also, the Housing and Economic Recovery Act of 2008 banned lenders from cross-selling products and requiring borrowers to purchase additional products in order to obtain an FHA reverse mortgage.
Reverse Mortgage for Purchase
In 2009, HUD introduced the FHA Reverse Mortgage for Purchase program. This program was created by Congress to help seniors transition into a home that better suited their changing needs, cutting costs and streamlining everything into one transaction. To help even more, FHA loan limits were increased to $625,500.
Strategic Reverse Mortgage Options
In September 2013, the FHA created options that allow the use of a reverse mortgage as a long-term financial planning tool rather than a crisis management tool.
Financial Assessment Requirement
Effective April 27, 2015, all lenders are required to evaluate the ability and willingness of all borrowers to meet the terms of the loan. While this may have an impact on the number of people who may have otherwise qualified, it is a responsible step in making sure that borrowers do not get set up to fail and that the insurance fund is strong and solvent.