When it comes to a reverse mortgage, there are terms that are unique to just the reverse mortgage / HECM program. The intent of this glossary is not to provide a full mortgage term glossary of terms, but mainly just terms one will encounter as they explore what a reverse mortgage is and what it can do for them.
Reverse Mortgage Glossary
Benefit – The amount of Principal Limit / Funds available to be dispersed to the borrower.
Counseling – 3rd party counseling is a requirement to do a HECM/Reverse Loan. The counselor’s job is educate the older homeowner in regard to RM’s, to inform them of the alternative options available to their given situation, and to assist in determining which particular HECM product fits their needs.
Durable Power of Attorney – A legal document that enables an individual to designate another person to act on their behalf even in the event the individual becomes disabled or incapacitated.
Expected Interest Rate – Used to calculate how much money the borrower will receive and based on the 10 year LIBOR SWAP rate plus an acceptable margin.
FHA – Federal Housing Administration (a division of HUD) insures lenders against loss in the event that a borrower defaults on their loan.
FHA Case Number – This establishes the FHA connection to the property and this number stays with the property until the loan is satisfied.
Floor – The lowest an interest rate can go.
Forward Mortgage – A traditional mortgage where the borrower makes monthly payments and pays the balance down over time.
Fully Indexed Rate – The note rate that is based on the margin and the index added together
Growth Rate – The rate at which the unused line of credit grows. On a HECM, it grows at the note rate plus 1.25%.
HECM – Acronym for Home Equity Conversion Mortgage which is just the FHA version of the Reverse Mortgage.
HECM 60 Fixed – The FHA reverse mortgage that has a note rate that is fixed for the life of the loan. MIP can vary dependent on the utilization. If 60% or below, MIP is .5% of appraised value or MCA (whichever is lower). If above 60% utilization, MIP is 2.5% of Appraisal or MCA.
HECM 60 LIBOR – The FHA reverse mortgage that has a note rate that is adjustable monthly.
HECM 60 Annual – The FHA reverse mortgage that has a note rate that is adjustable yearly.
HUD – Department of Housing & Urban Development. Works as a lending facilitator and helps borrowers by offering counseling services to potential mortgage clients.
Initial Interest Rate – The actual interest rate on the loan, changes monthly (or yearly on the annual), and is based on the 1 month LIBOR or 1 year LIBOR plus an acceptable margin.
Index – Part of the fully indexed rate. This is usually a published rate such as the 1 month LIBOR or 1 year LIBOR used on the HECM LIBOR and HECM Annual (respectively).
Incompetent – The inability of a senior to make rational legal, medical or healthcare decisions as determined by a licensed professional or physician.
Irrevocable Trust – A trust that cannot be changed or canceled once it is set up without the consent of the beneficiary.
Leased Property – The ownership of the land where a structure resides rests with another party not the owner of the structure.
LIBOR – Most common index used on adjustable rate mortgages. Stands for London InterBank Offered Rate, and is the daily referenced rate based on the rate banks offer to lend unsecured funds to other banks in the London wholesale money market.
Life Estate – The ownership of land for the duration of a person’s life and a legal arrangement where the “life tenant” during his life or her life retains use, possession, and maintenance of the property.
Life Expectancy Set-Aside: This is money that is set aside from the funds available to cover the cost of the property taxes and/or homeowner’s insurance for the expected life of the loan.
Line Of Credit (LOC)- A reverse mortgage benefit option that allows the borrower to make draws against the equity of their home. The benefit on this option also has the opportunity to grow larger over time. On the HECM, the unused portion of the LOC grows at the note rate plus 1.25%.
Lump Sum – A reverse Mortgage benefit option in which the borrower receives a large sum of cash upon the closing of the loan.
Manufactured Home – Housing units built in factories and transported to the sites for use.
Max Claim Amount – MCA = the amount of home value used in calculating the Principal Loan Limit on the FHA HECM. It is the lesser of the appraised value or the lending limit for HECM’s (limit is $625,500).
Mobile Home – Housing units built in factories rather than on site produced prior to the 1976 HUD code enactment.
Modular Homes – Homes built in factories in multiple modules or sections then delivered to their intended site of use and assembled. Modular Homes are considered Single Family Homes.
Mortgage – The document that ties the home as collateral for the note or loan.
Mortgage Insurance Premium – A monthly payment paid by the borrower for mortgage insurance. On a HECM this is added to the Principal Loan Balance.
Non Recourse Loan- A mortgage in which the borrower is protected by the fact that the home is the only asset that can be used to repay the note.
Note – The terms and conditions of the loan per the terms of the note for the loan.
Note Rate – The actual rate of the loan per the terms of the note for the loan.
Origination Fee – The charge for originating the loan.
Pre-Payment – Payment of the mortgage loan before the scheduled due date.
Principal Loan Balance – The amount used at settlement to pay liens and settlement charges. When the loan is official, this will accrue interest and grow as servicing fees, any monthly draws, any monthly advances, interest, and monthly mortgage insurance accrue.
Principal Loan Limit – The gross amount a borrower will qualify for with a reverse mortgage.
Principal Limit Lock – Locks in the clients benefit and is secured from when the client signs application and extends to 120 days past the opening of the FHA case number. The client will receive the best of market from the day they sign or the day they close.
Planned Unit Development (PUD) – A project or subdivision that includes common property that is owned and maintained by a homeowners association for the benefit and use of the individual PUD unit owners.
Rate Cap – The maximum amount an adjustable rate mortgage can adjust up or down. On a HECM there are no periodic caps on the monthly LIBOR (lifetime cap 10% over start rate) and the annual LIBOR adjusts 1 time per year (lifetime cap 5% over start rate and 2% per year).
Recording Fee – The fee to record all of the mortgage documents with the county where the property is located.
Repair Set Aside – A portion of the principal loan limit withheld until necessary repairs have been completed as a condition of closing the loan. Once the repairs have been completed and approved, this portion of the Principal Loan Limit will become available to the borrower.
Rescission Period – Federal law provides a 3 day “right of rescission”. This is the option for the client to cancel the contract for the loan without penalty within 3 business days (including Saturdays).
Residual Income – As it pertains to reverse mortgage, residual income refers to the amount of income left over monthly after subtracting the following from your total gross monthly income. The formula is Gross income – monthly amount for housing expenses (taxes, homeowner insurance, HOA, etc.) – monthly liability payments on credit report (car loans, credit card loans etc.) = your residual income.
Reverse Mortgage – A mortgage in which the borrower makes no payments and the interest is added onto the balance of the mortgage. The balance will grow until the borrower fully satisfies the loan.
Revocable Trust – A trust in which any of its provisions can be changed, or the trust itself can be cancelled at any time by the grantor.
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