Reverse Mortgage Terminology

Reverse Mortgage Terminology

Common Reverse Mortgage Terms Explained

HECM — Home Equity Conversion Mortgage
A reverse mortgage insured by the Federal Housing Administration (FHA) and available to eligible homeowners age 62 and older.

Proprietary Reverse Mortgage
A privately offered reverse mortgage that is not FHA-insured. Some proprietary programs may be available beginning at age 55, depending on the lender, program, property, and state.

Reverse for Purchase / HECM for Purchase
A reverse mortgage used to help purchase a new primary residence by combining borrower funds with reverse mortgage proceeds.

Reverse Second Mortgage
A proprietary reverse mortgage designed to allow an eligible existing first mortgage to remain in place while the homeowner accesses additional home equity through a subordinate reverse mortgage.

Principal Limit
The amount of proceeds initially available under a HECM based on factors including the borrower's age, eligible home value, and expected interest rate.

Principal Limit Factor (PLF)
A percentage used in determining the HECM principal limit. The factor varies based on the age of the youngest borrower or eligible non-borrowing spouse and the applicable expected interest rate.

Maximum Claim Amount (MCA)
For a HECM, the value used in calculating certain loan amounts, generally based on the lesser of the appraised value, applicable FHA HECM lending limit, or sales price for a purchase transaction, as applicable.

Mandatory Obligations
Certain amounts that must be paid at or through closing, such as existing liens, certain closing costs, and other required obligations.

Initial Principal Limit
The amount of HECM proceeds available before certain required obligations and other applicable amounts are deducted.

Initial Disbursement Limit
A HECM restriction that can limit the amount of proceeds available during the first 12 months, subject to applicable exceptions and requirements.

Line of Credit
An available method of receiving proceeds under certain adjustable-rate reverse mortgages. Funds can generally be accessed as needed, subject to the loan terms and available balance.

Line of Credit Growth
With an FHA HECM line of credit, unused borrowing capacity may increase over time according to the program's applicable growth calculation. This is not interest earned on money in an account.

LESA — Life Expectancy Set-Aside
Funds set aside from HECM proceeds to help pay certain property charges, generally property taxes and homeowners insurance, when required by the financial assessment.

Financial Assessment
The lender's evaluation of the borrower's credit history, income, expenses, and ability to meet ongoing property obligations.

Non-Borrowing Spouse
A borrower's spouse who is not a borrower on the reverse mortgage. Special HECM rules may provide certain protections for an eligible non-borrowing spouse when program requirements are satisfied.

Non-Recourse
A key reverse mortgage protection generally limiting repayment from the borrower or estate to the applicable value of the home under the program's rules; heirs are not personally responsible for a deficiency solely because the loan balance exceeds the home's value.

Maturity Event
An event that can cause the reverse mortgage to become due and payable, such as the last borrower permanently leaving the home, selling the property, or failing to meet certain loan obligations.

Mortgage Insurance Premium (MIP)
The FHA mortgage insurance charge associated with a HECM.

Counseling
Independent HUD-approved counseling required before obtaining an FHA HECM.

Servicing
Administration of the reverse mortgage after closing, including statements, advances, property-charge monitoring when applicable, and handling repayment when the loan becomes due.

Ways to Receive Reverse Mortgage Proceeds

Line of Credit
With certain adjustable-rate reverse mortgages, proceeds may be established as a line of credit that the borrower can access as needed, up to the amount available under the loan.

Line of Credit Growth
With an FHA HECM line of credit, unused borrowing capacity can increase over time according to the HECM program's applicable growth calculation.

This is important:

Line-of-credit growth is not interest being earned on money in a bank account. It represents an increase in the amount of available borrowing capacity under the HECM.

Tenure Payments
An available HECM payment option that provides scheduled monthly advances for as long as at least one borrower continues to occupy the home as a principal residence and the loan remains in good standing under the program requirements.

Term Payments
Scheduled monthly advances for a specific period selected by the borrower, subject to available proceeds and program requirements.

Lump-Sum Proceeds
A portion of available reverse-mortgage proceeds may be received at closing as a lump sum, subject to the loan type and applicable disbursement limitations.

Combination of Payment Options
Certain reverse mortgage programs may allow borrowers to combine available options—for example, receiving some proceeds initially while retaining additional funds in a line of credit.

Payment Options Depend on the Program

HECM and proprietary reverse mortgages don't necessarily offer the same methods of receiving proceeds. Fixed-rate and adjustable-rate reverse mortgages can also have different disbursement options.

Financial Assessment & Ongoing Responsibilities

Financial Assessment
For a HECM, the lender evaluates the borrower’s financial situation and credit history to determine whether the borrower has the financial capacity and willingness to meet ongoing obligations associated with the home.

The review may include income, expenses, assets, credit history, and payment of property-related charges.

LESA — Life Expectancy Set-Aside
A Life Expectancy Set-Aside is an amount reserved from HECM proceeds to help pay certain property charges—generally property taxes and homeowners insurance—when required as a result of the financial assessment.

A LESA may be fully funded or partially funded, depending on the circumstances and applicable HECM requirements.

Property Charges
Even though a reverse mortgage generally does not require monthly principal-and-interest payments while the loan requirements are being met, the homeowner remains responsible for applicable property-related expenses, which may include:

• Property taxes

• Homeowners insurance

• Flood insurance, when required

• HOA or condominium fees

• Other applicable property charges

• Maintaining the home according to loan requirements

Important: LESA Does Not Pay Everything

A LESA is not a general-purpose account for all expenses associated with the home.

For example, HOA or condominium association fees generally remain the homeowner's responsibility and are not paid from the LESA.

HECM Counseling
Before obtaining an FHA-insured HECM, the borrower must complete counseling with an independent HUD-approved HECM counselor.

Counseling is designed to help the borrower understand the reverse mortgage, costs, financial implications, alternatives, borrower responsibilities, and how the loan may affect the borrower and household.

Counseling Certificate
After successfully completing HECM counseling, the counselor issues a certificate documenting completion. The certificate is required as part of the HECM loan process and is subject to applicable validity requirements.

Borrowers, Spouses & Heirs

Non-Borrowing Spouse
A spouse who is not a borrower on the reverse mortgage. Under FHA HECM rules, an eligible non-borrowing spouse may have certain protections that can allow them to remain in the home after the borrowing spouse dies, provided applicable requirements continue to be met.

Non-Recourse Loan
HECM reverse mortgages are non-recourse loans. Generally, the borrower or estate will not owe more than the applicable value of the home when the loan is repaid under FHA requirements.

If the loan balance exceeds the home's value, the borrower or heirs are not personally responsible for the difference solely because of that deficiency.

Maturity Event
An event that may cause the reverse mortgage to become due and payable.

Examples can include:

• The home is sold

• The last borrower dies

• The home is no longer the borrower's principal residence

• The borrower permanently moves from the home

• Required property charges aren't paid

• The home isn't maintained according to loan requirements

• Other requirements of the reverse mortgage aren't met

Due and Payable
The point at which the reverse mortgage must be repaid according to the loan and program requirements. This commonly occurs following a maturity event.

What Happens to the Home?

The homeowner retains title to the home during the reverse mortgage. A reverse mortgage does not mean the lender owns the property.

When the loan becomes due, the borrower or heirs generally have options that may include:

• Repaying the reverse mortgage and keeping the home

• Refinancing the amount that must be repaid, if eligible

• Selling the home and using the proceeds to repay the loan

• Other options available under the applicable loan and program requirements

Heirs
The presence of a reverse mortgage doesn't prevent a home from passing to heirs. However, the reverse mortgage must be addressed when it becomes due and payable.

Equity Belongs to the Homeowner

If the home is sold for more than the amount required to satisfy the reverse mortgage and other applicable liens and selling expenses, the remaining equity belongs to the homeowner or estate.

Additional Reverse Mortgage Terms

Mortgage Insurance Premium (MIP)
FHA-insured HECM loans include mortgage insurance premiums. MIP helps support FHA's HECM insurance program and its borrower protections. An initial premium and ongoing mortgage insurance charges may apply.

Servicing
After closing, the reverse mortgage is administered by a loan servicer. The servicer may handle items such as loan statements, requests for available proceeds, payment-plan administration, property-charge monitoring when applicable, and repayment when the loan becomes due.

Principal Residence
For a HECM, the property must generally be the borrower's principal residence. Occupancy requirements continue after the reverse mortgage closes.

Occupancy Certification
Reverse mortgage borrowers may periodically be asked to certify that the home continues to be their principal residence.

Accrued Interest
Interest that is added to the reverse mortgage balance over time. Because required monthly principal-and-interest payments generally aren't made on a traditional reverse mortgage, interest and applicable charges typically increase the loan balance.

Available Proceeds
The portion of the reverse mortgage proceeds that remains available to the borrower after considering existing liens, mandatory obligations, closing costs, previous advances, set-asides, and applicable program limitations.

Still Have Questions About Reverse Mortgages?

Reverse mortgages can work very differently from traditional mortgages, and understanding the terminology is an important part of making an informed decision.

I'll help you understand how the loan works, what it costs, how much equity may be available, your responsibilities as a homeowner, and how the different reverse mortgage options compare.

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This glossary is provided for general educational purposes. Reverse mortgage terminology, requirements, features, and calculations may vary by loan type and program. FHA HECM loans and proprietary reverse mortgage programs have different requirements and features.