FHA, HECM or Home Equity Line of Credit?

The FHA Home Equity Conversion Mortgage has been through quite a number of changes in 2014—changes in the disbursement guidelines depending on whether the loan is a fixed rate or adjustable rate HECM, changes in the requirements for credit and financial verification, etc. But for many borrowers an FHA HECM could still be a viable, good option depending on individual circumtsances.

Borrowers who want to tap into their equity have a variety of options to choose from—among them the FHA Home Equity Conversion Mortgage, and also something available from conventional lenders called the Home Equity Line of Credit.

These two types of loans seem deceptively similar: both feature the ability to draw payments based on the equity in the property. But HECM loans are made for a specific type of borrower—those aged 62 and older.

The non-FHA Home Equity Line Of Credit or HELOC is available to a wider range of borrowers. Which one is right for you depends on your ability to borrow and your financial goals.

A HELOC is for all qualified borrowers to apply for a line of credit based on home equity. Debt to income ratios are important for a HELOC--your ability to pay the loan AND pay for the first mortgage will be evaluated.

That’s a major difference between a HELOC mortgage and a HECM loan. HELOCs require monthly payments, while FHA HECMs do not.

An FHA HECM loan is available ONLY to those age 62 and older who either own their homes outright, or have a small amount left to pay on the mortgage. HECM loans are not repaid while the borrower still owns the home and maintains the residence as the primary address. Unlike a HELOC, the FHA Home Equity Conversion Mortgage is paid in full when the borrower dies or sells the property.

HELOC and HECM loan proceeds alike may be used for home improvements, and can be structured as lines of credit. HECM loans may be arranged to be paid in a lump sum if the borrower chooses.

The HELOC option is structured to have specific draw periods where the borrower may tap into the line of credit, after which a repayment period begins.

Getting approved for a HELOC requires good credit scores, equity in the home, and having “substantial assets” can go a long way toward getting a HELOC approved.

HECM loans are governed by the FHA and require applicants to get financial counseling specific to the HECM loan program as a condition of loan approval. Additionally, the FHA official site states of HECM loans, “Income, assets, monthly living expenses, and credit history may be verified. Timely payment of real estate taxes, hazard and flood insurance premiums may be verified.” Talk to your loan officer to learn more about these two home loan options and how an FHA HECM could be right for you.

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