What Is a Home Equity Conversion Mortgage or HECM?

“I’ve spoken with countless homeowners who have investigated a reverse mortgage because they want to enhance their retirement income,” Auerswald says. “Many people find themselves with plenty of home equity but not enough cash flow to comfortably cover their living expenses and medical bills or simply enjoy their retirement. An HECM allows them to access that equity without having to sell their home or take on new debt.”

What are the requirements to qualify for an HECM?

To qualify for an HECM, Auerswald shares the following criteria:

• Age: You must be 62 years or older.
• Homeownership: The home must be your primary residence
• Equity: You must have substantial equity in your home or own it outright.
• Counseling: You are required to undergo a counseling session with a HUD-approved counselor to ensure you fully understand the terms of the HECM.
• Financial assessment: You need to demonstrate that you can afford to continue paying property taxes, homeowners insurance, and maintenance costs.

“It is essential that the homeowner has either paid off the mortgage or has a low enough balance that it can be cleared with the HECM proceeds,” Auerswald explains. “The amount a homeowner can receive through an HECM is based on current interest rates and the age of the youngest borrower or eligible non-borrowing spouse, as this is tied to the borrower’s life expectancy.”

Because an HECM is a reverse mortgage insured by the Federal Housing Administration, you’ll have plenty of opportunities to ask questions before you sign a loan agreement.

“Attending the required counseling session with a HUD-approved counselor is a critical step to ensure that the homeowner fully understands the benefits and responsibilities associated with a reverse mortgage,” Auerswald says.

If you are unable to fully meet the financial requirements, a lender can set aside funds from your HECM to pay these costs on your behalf. However, this will reduce the amount of money you’ll be qualified to borrow.

How do I get an HECM?

Securing a home equity conversion mortgage involves several steps. Here’s a guide to help you navigate the process:

1. Find HUD-approved lenders: Start by using HUD’s lender list search tool to identify lenders in your area that are approved to offer HECM loans. This ensures you’re working with reputable lenders who meet federal guidelines.

2. Research and vet lenders: Once you have a list of potential lenders, take the time to research their reputations. Look for reviews, ask for recommendations, and check if they have any complaints filed with the Better Business Bureau or other consumer protection agencies.

3. Apply to more than one lender: To get the best possible terms, apply to multiple lenders. Different lenders may offer varying rates and terms, so comparing options will help you find the most favorable loan.

4. Attend a counseling session: Before finalizing your loan, you’ll need to attend a counseling session with a HUD-approved counselor. This session is designed to ensure you fully understand the terms and implications of an HECM, so you can make an informed decision.

5. Compare offers: After receiving offers from the lenders you applied to, carefully compare them. Look at the interest rates, fees, loan amounts, and any other terms that could impact your decision.

6. Select your HECM loan: Once you’ve compared all the offers, choose the HECM loan that best fits your needs. From there, you’ll work with the lender to complete the necessary paperwork and proceed with the loan.

“We’ve long been proponents of encouraging prospects to shop around and compare rates and fees,” Auerswald says. “Lenders set their own margins, and the end results can significantly affect the proceeds you receive. It’s crucial to compare offers from different lenders to ensure you’re getting the best possible deal.”