Recently we wrote about proposed changes to strengthen the FHA Reverse Mortgage loan program and about basics of the FHA Reverse Mortgage program. We left off with a promise to discuss how the reverse mortgage, also known as an FHA Home Equity Conversion Mortgage (HECM), pays out once the loan has closed.
A HECM borrower’s payout (also known as a disbursement) depends on the nature of the HECM loan. The rules for cash back to the borrower differ based on whether the borrower has a fixed interest rate HECM loan or an adjustable rate HECM.
The FHA/HUD official site states that borrowers who have adjustable rate HECM loans are eligible for the following payment options:
Tenure-equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.
Term-equal monthly payments for a fixed period of months selected.
Line of Credit-unscheduled payments or in installments, at times and in an amount of your choosing until the line of credit is exhausted.
Modified Tenure-combination of line of credit and scheduled monthly payments for as long as you remain in the home.
Modified Term-combination of line of credit plus monthly payments for a fixed period of months selected by the borrower.
For borrowers with a fixed rate HECM or FHA Reverse Mortgage, the payment is a single lump sum disbursement which is paid at mortgage closing time.
Some borrowers make it through the Reverse Mortgage loan process only to decide later they don’t want to proceed with the loan. Under the law, all qualified reverse mortgage or FHA HECM loan applicants have three calendar days to cancel the loan after it closes.
According to the FHA official site, this is known as the three day right of rescission. “The process of canceling the loan should be explained at loan closing. Be sure to ask the lender for instructions on this process. Mortgage lenders differ in the process of canceling a loan. You should ask for the names of the appropriate people, phone numbers, fax numbers, addresses, or written instructions on whatever process the company has in place.”
There is a very important exception to this right of rescission. According to the FHA/HUD official site, “In most cases, the right of rescission will not be applicable to HECM for purchase transactions.”
FHA reverse mortgages are for qualified borrowers age 62 or older who either own their homes outright or are close to owning them. FHA loan requirements for reverse mortgages include mandatory HECM loan counseling that must be completed as a condition of loan approval.
Borrowers must, as a condition of the HECM loan, stay current on all property taxes and related obligations. Failure to do so is grounds for having the loan declared due in full. You can learn more about reverse mortgage program rules at the FHA official site.
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