USDA Loan Program Loan Eligibility

If you are a homeowner age 62 or older and have paid off your mortgage or paid down a considerable amount, and are currently living in the home, you may participate in FHA's HECM program. The HECM is FHA's reverse mortgage program that enables you to withdraw a portion of your home's equity.

The amount that will be available for withdrawal varies by borrower and depends on:

1. Age of the youngest borrower or eligible non-borrowing spouse;

2. Current interest rate; and

3. Lesser of appraised value or the HECM FHA mortgage limit or the sales price.

If there is more than one borrower and no eligible non-borrowing spouse, the age of the youngest borrower is used to determine the amount you can borrow.

You can also use a HECM to purchase a primary residence if you are able to use cash on hand to pay the difference between the HECM proceeds and the sales price plus closing costs for the property you are purchasing.

How does a reverse mortgage work?

1. Access a portion of your home’s equity

2. Percentage is based on age of youngest borrower

3. Make no monthly mortgage repayments

4. Funds are tax-free, and may be used for virtually anything

5. Loan is repaid when you pass away or sell your home

6. Any remaining equity belongs to your heirs

A reverse mortgage is different than a traditional, or “forward” loan, in that it operates exactly in reverse.

The traditional loan is a falling debt, rising equity loan, while the reverse mortgage is a falling equity, rising debt loan.

In other words, as you make payments on a traditional loan, the amount you owe is reduced and therefore the equity you have in the property increases over time.

With the reverse mortgage you make no regular payments, so as you draw out funds and as interest accrues on the loan, the balance grows and your equity position in the property becomes smaller.

There is a secret here that I’m going to let you in on. Two, actually. There is never a payment due on a reverse mortgage and there is also no prepayment penalty of any kind.

In other words, you can make a payment at any time, up to and including payment in full, without penalty.

Many borrowers choose to repay some or all the accruing interest, or whatever amount they desire. The choice is yours.

How Much You May Receive

The amount loaned in a reverse mortgage is determined differently than a standard mortgage.

You don’t hear people talking about the “loan-to-value ratio” like you would on a traditional loan.

On a traditional loan, the lender agrees to lend a set amount that is determined as a percentage of the value of the home.

This can change based on several factors, including the borrower’s credit, the required loan amount, and the property type.

1. The age of the youngest borrower, value of the home or the HUD lending limit (whichever is less)

2. The interest rates in effect at the time.

3. Costs to obtain the loan (which are subtracted from the Principal Limit)

4. Existing mortgages and liens (which must be paid in full)

5. Any remaining money belongs to you or your heirs.

The older you are when you take out a reverse mortgage, the more you will receive under the program based on the HUD calculator.

You must be at least 62 years of age for a reverse mortgage.

The Principal Limit of the loan is determined based on the age of the youngest borrower because the program uses actuarial tables to determine how long borrowers are likely to continue to accrue interest.

If there are multiple borrowers, the age of the youngest borrower will lower the amount available because the terms allow all borrowers to live in the home for the rest of their lives without having to make a payment.

Of course there will always be exceptions, but the premise is that a 62-year-old borrower will be able to accrue a lot more interest over his or her life than an 82-year-old borrower with the same terms, so the HUD calculator allows the 82-year-old borrower to start with a higher Principal Limit.