April 28, 2011
The FHA Home Equity Conversion Mortgage or HECM loan, also known as a reverse mortgage, has terms and conditions that must be clearly understood in order to get the most out of the loan.
HECM loans have strict rules that must be followed in order to avoid violating the terms and conditions, which is why the FHA requires HECM loan borrowers to get counseling on reverse mortgages before they can be approved for an FHA HECM loan.
The reason understanding these terms and conditions are so important has much to do with the nature of the loan itself–no payments are due from the borrower at any time unless he or she dies or sells the home. But if the borrower violates the terms of the loan, the lender is able to declare the HECM loan immediately due and payable.
That could force the borrower to sell the property–possibly at a loss–in order to repay the HECM loan.
One of the most important requirements to be aware of with HECM loans and reverse mortgages is occupancy. The FHA requires HECM borrowers to live on the property secured with the VA mortgage as their primary residence. If the borrower is away from that property for a year or more, it can be considered a violation of the primary occupancy rules.
That’s a fairly well-known clause in most FHA reverse mortgage loan contracts and should come as no surprise to anyone used to doing business with the FHA or a newcomer who has taken the required counseling sessions.
But other clauses, not as well-known, also apply. For example, HECM loans require the borrower to maintain the property in good repair. Presumably, this is to maintain the market value of the home and insure it can be sold for what it would be worth in good repair when the time comes.
Borrowers who fail to maintain the property can be considered in violation of the HECM loan agreement and the lender could call the loan immediately payable.
Most borrowers don’t take out home loans intending for their property to fall into disrepair. But the borrower who has health issues requiring extended care may be unable to take care of planned maintenance or routine upkeep. HECM borrowers should plan for these contingencies to make sure they don’t fall into violation of their loan agreements. A little advance planning on how the home should be cared for, bills paid and other factors can prevent an unexpected situation from turning into a threat to home ownership.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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