Stay Informed About Home Equity Conversion Loans

September 14, 2015

The Consumer Financial Protection Bureau (CFPB) is a government watchdog agency designed to help consumers get the most out of their credit, avoid scams, and learn how to be more financially literate. The CFPB official site now features a  consumer advisory, advising those applying for Home Equity Conversion Mortgage loans to carefully read their contracts and pay close attention to the terms and conditions of the HECM loan. CFPB says it has become aware of some lenders allegedly using false or misleading language in advertising about HECM loans.

A HECM loan or reverse mortgage loan is just what the name implies, a loan with legally binding financial agreements. HECM loans, even FHA-backed HECMs, are not an entitlement or a government benefit. FHA HECM loans should not presented as a government benefit. If you are in the market for a HECM loan, remember that a participating FHA lender is required to represent HECM loans properly in order to be an FHA lender in good standing.

What’s more, FHA loan rules have built-in mandatory counseling rules about the HECM program in order to insure borrowers are fully informed.

The CFPB advisory to HECM loan applicants urges them to understand the true nature of the HECM loan. It’s a financial agreement that can be very advantageous to the borrower under the right conditions, but knowing the full scope and requirements of the HECM loan program is crucial:

“Reverse mortgages have fees and compounding interest that must be repaid, just like other home loans. With most reverse mortgages, federal insurance guarantees that borrowers will receive their loan funds if their lender has financial difficulty or if their loan balance exceeds the value of their home. However, borrowers pay for this insurance and its not a government benefit.”

Furthermore, borrowers should not assume they will “always live in your home” or that you can stay in the home “as long as you want”--this is only true as long as the borrower meets HECM loan conditions as defined in the loan agreement. Those conditions include FHA requirements that the borrower stays current on property taxes, and the property that guarantees the HECM loan must be used the borrower’s primary residence. According to CFPB:

“When a reverse mortgage ad says you’ll retain ownership of your home, or that you can live there as long as you want to, don’t take these messages at face value. These statements are true only if you continue to meet all requirements of the reverse mortgage. If you fall behind on your property taxes or homeowners insurance, are absent from your home for longer than six months, or fail to satisfy other requirements, you can trigger a loan default. If you don’t take care of the default in time, the lender can foreclose on your home. Sometimes these requirements are listed in fine print, but not always. If you have a question about reverse mortgage requirements, contact a HUD-approved housing counselor near you.”

The nature and requirements of FHA HECM loans have changed a great deal in the last two years or so. HECM loan payouts and other financial arrangements depend greatly on the specific details of your HECM loan such as the type of interest–fixed or adjustable interest rates, etc. It’s important to make the most informed decisions possible regarding a HECM loan--did you know you can call the FHA to ask for a referral to HUD-approved housing counselors in your area? To get a referral, call the FHA toll-free: 1-800 CALL FHA.