The FHA Reverse Mortgage program, also known as a Home Equity Conversion Mortgage, is a type of loan product available to borrowers age 62 and older and with sufficient equity built up in the property. The reverse mortgage program offered by the FHA has terms that include no monthly payments.
The HECM is paid off when the owner dies or sells the property. The borrower gets the proceeds from the HECM loan dispensed according to the loan agreement, which can include a line of credit, installment payments or a combination of the two.
Because of the unique nature of an FHA HECM loan compared to other mortgage loans, the FHA requires the applicant to get loan counseling before the loan may be approved. The FHA wants borrowers to be fully informed as to the nature of the commitment made with a HECM loan including occupancy rules and other requirements. Because of this, the FHA instructs lenders on how to proceed with a HECM loan application before and after the mandatory counseling.
According to the FHA official site, “HUD recommends and urges mortgagees to refer clients to counseling prior to taking initial application.” FHA guidelines do not specifically prohibit a lender from accepting a HECM loan application from a borrower who has not had the required counseling session, but the rules do limit the actions the lender can take if the application is accepted prior to counseling.
The lender is allowed to explain the program, discuss eligibility, fees and charges, and discuss the financial commitment the borrower is making when the loan is closed. The lender may also, “provide the borrower with copies of the mortgage, note, and Loan Agreement; use automated valuation models (AVMs) to perform a preliminary estimation of the value of the property.”
The most important part in all this is what the FHA rules say about the borrower’s obligation at this point–if the required loan counseling has not taken place the rules are clear; “…the potential HECM borrower is not obligated to pursue a HECM loan from a lender who takes an initial loan application or discusses the HECM program with the potential mortgagor before the potential mortgagor completes the counseling. ”
FHA rules also state that if a borrower does not close on a HECM loan, he or she cannot be charged for any services mentioned above. Furthermore, “…the mortgagee may only proceed to process the initial HECM loan application once the counseling is complete, as evidenced by the signed and dated counseling certificate.”