What does HUD have to do with a reverse mortgage?

Reverse mortgages have become increasingly popular for senior homeowners who have built equity in their homes and are looking to supplement their retirement income. If you want to borrow a reverse mortgage backed by the federal government, you must meet the reverse mortgage requirements provided by the US Department of Housing and Urban Development and the Federal Housing Administration.

HUD is the federal agency that oversees the Federal Housing Administration (FHA), which is known for its reverse mortgage program- the Home Equity Conversion Mortgage (HECM). HECM is FHA-insured, and this means borrowers pay insurance premiums to FHA. In the event of default, FHA compensates the lender for the losses incurred in the reverse mortgage loan.

What is HUD?

The US Department of Housing and Urban Development (HUD) is a federal government agency that was established in 1965 as part of then-President Lyndon Johnson's plan to expand America's welfare state. The agency is responsible for providing affordable homeownership opportunities and ensuring everyone has access to housing without discrimination.  

HUD is headed by a secretary appointed by the president and approved by the Senate. The secretary manages various public programs that encourage homeownership, reduce homeownership, and fight housing discrimination. Notably, HUD oversees the Federal Housing Administration (FHA), which is known for its mortgage insurance program that allows senior homeowners to get FHA home loans, even if they do not qualify for a conventional mortgage due to low down payments or low credit scores.

What is FHA Reverse Mortgage?

An FHA reverse mortgage, also known as a HUD reverse mortgage, is a type of reverse mortgage that is backed by the federal government. The FHA collects insurance premiums on reverse mortgages and compensates lenders in case of defaults. FHA provides insurance for a type of reverse mortgage known as a Home Equity Conversion Mortgage (HECM).

HECM loans allow senior homeowners age 62 or older to tap their home’s equity without having to sell the home or move out. Eligible homeowners can receive payments in a lump sum, installment payments, line of credit, or a combination of these options.

Also, unlike a traditional mortgage, a HECM loan does not require borrowers to make monthly mortgage payments. Instead, the loan accumulates over the borrower’s lifetime, and it only becomes due and payable when the property is sold, the homeowner moves out, or dies. The heirs of the homeowner’s estate can also choose to pay the amount due if they wish to keep the house.

If the property is sold, the lender recovers the loan principal, interest, and other reverse mortgage costs. Any remaining value of the property is paid to the homeowner or his/her heirs. However, if the home sells for less than the amount owed, the homeowner cannot pay more than the home is worth. In such a case, HUD will pay the lender an amount equal to the shortfall.

Requirements to qualify for an FHA reverse mortgage

To qualify for an FHA-insured reverse mortgage, you should meet the following requirements:

Age requirements

Reverse mortgages allow homeowners to access the equity they have built in their homes. Therefore, you must be at least age 62 or older to qualify for a reverse mortgage. If you want to add your spouse as a co-borrower, they must also be age 62 or older.

Financial requirements

You must have sufficient financial resources to continue paying property taxes, property maintenance costs, homeowner insurance costs, and other required fees.

To ensure borrowers are financially able to meet the ongoing costs, HUD requires that borrowers must undergo a financial assessment. If the financial assessment shows that you don’t have sufficient income to pay the ongoing costs, the lender may require you to set aside a portion of the loan proceeds in a Life Expectancy Set Aside.

HECM borrowers must also attend a counseling session either in person or via phone with a counseling agency. During the counseling session, the counselor explains the requirements of reverse mortgages, how reverse mortgages work, and alternatives to FHA-insured reverse mortgages.

Property requirements

Generally, you must have built sufficient equity in your home, usually at least 50% equity, to qualify for a reverse mortgage. Also, the property must be your primary residence.

The type of home must satisfy FHA requirements. The home must be a single-family home or up to a four-unit home with at least one unit being used as a primary residence. If you live in a condominium or manufactured home, it must meet FHA requirements. Also, the home must meet HUD’s property standards. During the appraisal, the lender’s appraiser will be required to evaluate the home to determine if it meets the FHA and HUD requirements.

What are HUD homes?

HUD homes refer to foreclosed homes that were purchased with FHA-insured mortgages but the homeowners have defaulted on payments. These properties become HUD homes when the homeowner is unable to meet their loan obligations and defaults on the loan payments, resulting in a foreclosure.

HUD compensates the lenders for the unpaid mortgage balance and seizes the property. HUD then sells the seized property to recover the mortgage costs. Owner-occupant buyers may be allowed up to 30 days to bid on the property before the bidding process opens to the public. HUD homes are sold at auction or on the HUD's listing website.

Usually, HUD homes are sold below the market costs on "as is" basis to encourage potential homeowners to buy them. HUD does not pay for any repairs to the home, and the new homeowner will be required to incur property maintenance costs.

Alternatives to FHA Reverse Mortgage loans

HECMs are the most popular type of reverse mortgage, but there are other types of reverse mortgages available.

Private lenders may offer their own type of reverse mortgage known as proprietary reverse mortgages, which are also referred to as Jumbo reverse mortgages. These reverse mortgage loans are not FHA-insured, and they may not follow all the requirements of HECMs. Also, they can have higher lending limits than HECMs.

The single-purpose reverse mortgage is another alternative to HECMs. These reverse mortgages are issued to low-to-moderate income households by state governments and non-profit organizations. Single-purpose reverse mortgages must be used for a specific purpose like paying property taxes or home upgrades.