The Federally-Insured Reverse Mortgage – Home Equity Conversion Mortgages (HECMs) – Are Insured By The Federal Housing Administration (FHA).
FHA requires a Mortgage Insurance Premium (MIP) to be collected at closing and during the life of the loan. These premiums are charged to the borrower’s loan balance. The upfront Mortgage Insurance Premium (MIP) is calculated at 2.0% of your home’s appraised value or a maximum of $851,000 in high-cost areas such as in California (the national lending limit cap). For example, a home appraised at $800,000 would have a one-time upfront FHA insurance premium of $16,000. The ongoing FHA insurance premiums are .5% (one-half of one-percent) of each month’s calculated outstanding loan balance. Since monthly mortgage payments are not required to be made, any monthly MIP premium that goes unpaid, gets added to the balance of the loan and gets paid once the home sells or the loan is paid off.
There are now non-FHA HECM reverse mortgages available that do not require MIP. You can read up on the different types of reverse mortgages on my site to learn the differences.
This MIP insurance provides the following protections and peace of mind for borrowers and their children:
- The borrower(s) are not required to pay more than the home’s fair market value.
- If the loan balance exceeds the value of the home, FHA reimburses the lender for the difference when the estate sells the home. It’s like gap insurance. If you are upside down and owe more than the property is worth, the insurance pays the gap. The homeowner and heirs are not responsible for any loss since the reverse mortgage is a non-recourse loan.
- Payments made to the borrower by the lender are insured by FHA. If the lender is unable to continue making payments, the payments would be made by FHA.
- If the loan balance grows and exceeds the home’s present market value, the lender cannot take title. FHA insures that borrowers can live in their home as long as basic loan obligations are met (homeowner’s insurance in force, property tax payments current and the home is maintained in good condition). For non-FHA reverse mortgage loans, they do not have FHA MIP insurance as HECM reverse mortgages do. In exchange for not having this insurance, the non-HECM loans have a higher interest rate, but are still non-recourse loans.
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