What is a home equity conversion mortgage (HECM)?

The terms home equity conversion mortgage (HECM) and reverse mortgage are often used interchangeably, and in many ways, they are the same. In fact, all HECMs are reverse mortgage loans. However, not all reverse mortgage loans are HECMs. It’s kind of like all ducks are birds, but not all birds are ducks. Here’s a look at what distinguishes a HECM from all the other reverse mortgages in the pond.

What makes a reverse mortgage a HECM?

The big difference between a HECM and other reverse mortgages is that a HECM is insured by the federal government. This insurance means that even if their lender faces financial challenges, HECM borrowers can be confident that they will receive their loan payouts or access the line of credit as specified in the terms of their loan. That’s because the FHA insurance required for every HECM guarantees that if something happens to the lender, the borrowers will continue to receive their payouts.

Another advantage of an FHA-insured loan is non-recourse status. All HECMs are nonrecourse, which means the borrower will never owe more than the home is worth. If a borrower sells the house for less than what they owe on the loan, the lender cannot look to their other assets to satisfy the debt. The Federal Housing Administration (FHA) will cover the difference. Most non-HECM reverse mortgages are also non-recourse, but it’s always a good idea to be sure this is included in your loan terms.

Reverse Mortgages in Brief

A reverse mortgage is a type of loan that allows older homeowners to convert a portion of their home equity into cash without selling the property or making required monthly payments. While they don’t have to make monthly payments on the loan, borrowers are still responsible for property taxes, insurance and any HOA fees. The loan comes due when the homeowner sells the home, moves out, passes away, or fails to comply with their loan terms.

HECM eligibility requirements

HECM borrowers must meet several government-mandated eligibility requirements designed to protect both the borrower and the lender. They must be:

Be 62 years or older.
Live in the home as their primary address.
Own the home outright or have considerable equity in the house.
Not have any delinquent federal debt.
Be able to maintain the home and pay ongoing property taxes, homeowner’s insurance, and other property-related expenses like HOA fees.

In addition to the eligibility requirements above, HUD requires that all HECM borrowers meet with a third-party HUD counselor to review how a HECM works and ensure they understand their obligations. During this session, counselors will discuss how borrowers will receive loan proceeds and what will trigger the loan to come due. 

To be eligible, a property must be one of the following:

A single-family home
A 2-4 unit property in which the owner lives
An FHA-approved condominium or manufactured home.

Mobile homes and properties with more than four units are considered commercial properties and are not eligible for a HECM.

Additional borrower safeguards

Because they are insured by the FHA, the Department of Housing and Urban Development (HUD) has been instrumental in working to ensure that HECM borrowers don’t enter into loans they don’t fully understand or are not financially equipped to manage.

HUD-mandated safeguards include:

A third-party HUD-approved counseling session.
A financial assessment conducted by the lender to determine if the borrower is financially able to uphold the terms and meet the loan’s obligations.
HECM borrowers are only allowed to take a percentage of their total available funds in the first year of the loan.
Non-borrowing spouses who meet certain qualifications are offered protection from eviction if the borrowing spouse dies.

How much can the homeowner borrow? 

HUD sets guidelines for how much a homeowner can borrow with HECM. In 2024, the borrowing limit is $1,149,825, regardless of the home’s value.

The amount available to borrow is determined by multiple factors, including:

The amount of equity available in the home.
The age of the younger borrower or qualified non-borrowing spouse.
The current interest rate.
The lower of the home’s appraised value or the HUD limit.

While they do have limitations on how much a borrower can take, HECMs offer some unique payment flexibility that many proprietary reverse mortgages do not. HECM borrowers can take their loan payouts as a lump sum, in monthly installments, as a line of credit, or a combination of the three. These options give homeowners the unique ability to strategize payouts to suit their future needs and retirement plans.

Fees and costs of a HECM

Loan fees and costs will also impact the amount a borrower receives via proceeds. While some upfront fees need to be paid out of pocket, the larger fees can be rolled into the loan. Choosing to cover fees with loan proceeds will decrease the money available to the borrower. 

Loan costs include the following: 

Mortgage insurance premiums (upfront and annual).
Third-party fees like appraisals, title searches, surveys, inspections, etc.
Origination fee capped at $6,000.
A servicing fee paid to the lender for the tasks they undertake regarding your loan.
Interest.

A brief history of HECMS

In the last four decades, reverse mortgages have undergone many changes, including increased regulation and government oversight. Though not introduced until 1998, the HECM has been integral to the loan’s evolution. Here is a brief history of key events in the loan’s trajectory. 

1961. First reverse mortgage issued to a widow by a savings and loan lender in Portland, Maine. 
1997. National Reverse Mortgage Lending Association (NRMLA) established in Washington, DC. This trade organization aims to report on reverse mortgage sales and conduct lobbying efforts. 
October 19, 1998. The first government-insured reverse mortgage was closed by James Nutter and Company in Kansas City, Missouri. 
2005. HECM refinancing becomes available.
2009. HECM for purchase introduced.
2013. HUD introduces safeguards to make HECMs a safer product for consumers, including the restriction that a borrower can tap only a certain portion of their equity in the first year. 
2015. Lenders are required to conduct a financial assessment to determine if borrowers can afford the mortgage requirements.      
2021. HUD Added Protections for Non-Borrower Spouses. In, legislation allowed for non-borrowing spouses to stay in the home even after the last borrower moves to a nursing facility or passes away. 
2022. HUD increased the borrowing limit for HECMs from $822,375 to $970,800. 
2023. The limit increased to $1,089,300.
2024. The limit increased to $1,149,825.

Today HECMs are available in all 50 states, the District of Columbia, and Puerto Rico. They can even be used to purchase a new home. If you are interested in a HECM for yourself, a great place to start is by speaking with a trusted financial advisor. Or feel free to reach out to one of our qualified experts, who will be happy to answer your questions and discuss your situation one on one.

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This article is intended for general informational and educational purposes only and should not be construed as financial or tax advice. For tax advice, please consult a tax professional. For more information about whether a reverse mortgage fits into your retirement strategy, you should consult your financial advisor.