— ABOUT THE Reverse Mortgages

A Home Equity Conversion Mortgage – commonly referred to as a HECM or reverse mortgage – is a federally insured loan program administered under the guidelines of the Federal Housing Administration. It allows eligible homeowners age 62 and older to access a portion of their accumulated home equity without making required monthly principal and interest payments, provided they continue to occupy the property as their primary residence and fulfill ongoing obligations related to taxes, insurance, and property maintenance.

Unlike a traditional forward mortgage, in which the borrower makes monthly payments that reduce the outstanding balance over time, a reverse mortgage accrues interest and fees onto the loan balance. The loan does not become due until the borrower permanently vacates the home, sells the property, or passes away. At that point, the loan is repaid – typically through the sale of the home – and any remaining equity belongs to the borrower or their heirs.

HECM loans are insured by FHA and are available to eligible borrowers nationwide. Pacific Home Loans provides HECM reverse mortgage financing for qualified homeowners across all states in which we are licensed.

A reverse mortgage is a long-term financial commitment with material implications for estate planning, retirement cash flow, and housing equity. Pacific Home Loans encourages all prospective borrowers to complete HUD-approved counseling and to consult with a qualified financial advisor, tax professional, and estate attorney before proceeding.

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— HOW IT WORKS

The Borrower Retains Title
The homeowner retains title to the property for the life of the loan. The lender does not take ownership of the home. The loan becomes due when the borrower permanently vacates the property as their primary residence, sells the home, or passes away.

Non-Recourse Protection
HECM loans are non-recourse instruments, which means that repayment at loan maturity will not exceed the appraised value of the home at the time of sale, subject to FHA guidelines. If the outstanding loan balance exceeds the home’s value – a scenario that can occur if the borrower lives in the home for an extended period or if property values decline – the FHA insurance fund covers the shortfall. The borrower’s other assets, and those of their heirs, are not at risk.

Ongoing Borrower Obligations
The absence of required monthly mortgage payments does not eliminate all financial obligations associated with the property. For the loan to remain in good standing, the borrower must:

• Pay property taxes when due
• Maintain homeowner’s insurance coverage at required levels
• Maintain flood insurance if required by program guidelines
• Maintain the property in a condition consistent with FHA minimum property standards

Failure to fulfill these obligations may cause the loan to be declared due and payable. These requirements persist for the full duration of the borrower’s occupancy.

— DISBURSEMENT OPTIONS

Eligible borrowers may receive reverse mortgage proceeds in several structures, and the appropriate disbursement method depends on the borrower’s financial objectives, income needs, and long-term planning goals. The amount available in any form is determined by borrower age, property value, current interest rates, and FHA lending limits at the time of application.

Lump Sum
A single disbursement of available proceeds at closing, available under fixed-rate HECM structures. Appropriate for borrowers with a specific immediate financial objective such as paying off an existing mortgage, funding a large expense, or consolidating obligations.

Monthly Payments
Scheduled monthly disbursements for either a defined term or for as long as the borrower occupies the home as a primary residence (tenure payments). Appropriate for borrowers seeking a supplemental monthly income stream during retirement.

Line of Credit
Proceeds are held in a line of credit from which the borrower may draw at any time in amounts of their choosing. A notable feature of the HECM line of credit is that the unused portion grows over time at the same rate as the loan’s interest rate – meaning that available credit increases the longer it remains unused, subject to program terms. This growth feature can make the line of credit an effective long-term planning tool for borrowers who do not need immediate access to the full available amount.

Combination
A combination of monthly payments and a line of credit, allowing the borrower to structure disbursements to address both ongoing income needs and reserve capacity for future use.

— THE LESA

As part of the FHA reverse mortgage process, every borrower undergoes a financial assessment conducted by the lender. This assessment evaluates the borrower’s income, credit history, and demonstrated history of paying property-related obligations – specifically property taxes and homeowner’s insurance. The purpose of the assessment is to evaluate whether the borrower is likely to sustain compliance with the ongoing tax and insurance obligations required to keep the loan in good standing.

When a LESA Is Required
If the financial assessment identifies limited income capacity, a history of late or missed property tax or insurance payments, or other indicators of financial stress, FHA guidelines may require the establishment of a Life Expectancy Set-Aside as a condition of loan approval.

What a LESA Does
A LESA is a reserve account funded from the borrower’s available reverse mortgage proceeds at closing. Funds in the LESA are held by the servicer and disbursed directly to the county tax authority and insurance carriers as property taxes and insurance premiums become due. The borrower does not manage these payments directly – the servicer handles disbursement on behalf of the borrower for the duration of the set-aside period.

Financial Impact of a LESA
Because LESA funds are drawn from the total available proceeds at closing, the establishment of a LESA reduces the amount of equity available to the borrower in other disbursement forms – whether as a lump sum, monthly payment, or line of credit. The reduction in available proceeds is proportional to the amount set aside.

A LESA is not a penalty. It is a protective structure that enables borrowers who might otherwise not qualify – due to past credit challenges or demonstrated difficulty meeting property obligations – to access the reverse mortgage program with an automated mechanism ensuring that critical ongoing obligations are met. It benefits both the borrower, by reducing the risk of loan acceleration due to tax or insurance default, and the FHA insurance program, by reducing the incidence of non-compliance.

Fully Funded vs. Partially Funded LESA
The financial assessment may result in either a fully funded LESA – covering the full projected cost of taxes and insurance for the expected life of the loan – or a partially funded LESA, depending on the specific findings of the assessment and FHA guidelines applicable at the time of origination.

— ELIGIBLE USES

A reverse mortgage may be appropriate across a range of financial planning contexts. Common applications include:

Elimination of an Existing Mortgage Payment
Refinancing an existing forward mortgage into a reverse mortgage eliminates the required monthly principal and interest payment, which can substantially improve monthly cash flow for a retired homeowner on a fixed income. The existing mortgage is paid off from reverse mortgage proceeds at closing.

Supplemental Retirement Income
Monthly disbursements or an accessible line of credit can provide a supplement to Social Security, pension income, or investment distributions – particularly during periods when other income sources may be reduced or when large unexpected expenses arise.

Deferred Line of Credit for Future Needs
Establishing a reverse mortgage line of credit early in retirement – even without an immediate need for funds – allows the available credit balance to grow over time. This strategy can preserve the line of credit as a financial reserve for future healthcare costs, home modifications, or other retirement planning needs.

Refinancing an Existing Reverse Mortgage
Homeowners who obtained a reverse mortgage at an earlier date may benefit from refinancing into a new HECM if the home’s value has increased substantially, if interest rates have changed favorably, or if the borrower wishes to convert disbursement structure or add a non-borrowing spouse to the loan.

— ELIGIBILITY

To qualify for a HECM reverse mortgage, the following conditions must be satisfied:

• The youngest borrower or eligible non-borrowing spouse must be at least 62 years of age
• The property must be the borrower’s primary residence
• The borrower must have sufficient equity in the property to support the loan
• The borrower must complete a counseling session with a HUD-approved reverse mortgage counseling agency prior to application
• The borrower must satisfy the FHA financial assessment requirements, including review of income, credit history, and property charge payment history
• The property must meet FHA minimum property standards

Eligible Property Types
HECM financing is available for single-family homes, FHA-approved condominium units, and certain manufactured homes meeting FHA standards. Multi-unit properties up to four units may be eligible if the borrower occupies one unit as a primary residence.

HUD-Approved Counseling Requirement
Federal law requires that all prospective HECM borrowers complete a counseling session with an independent HUD-approved counseling agency before a loan application can proceed. The counseling session is designed to ensure that borrowers fully understand the program’s mechanics, costs, obligations, and alternatives. A counseling certificate issued by the approved agency is required as part of the application package.

The counseling requirement is a consumer protection – not a formality. Borrowers are encouraged to approach the session as a substantive educational engagement and to arrive with questions prepared.

— COSTS AND CONSIDERATIONS

A reverse mortgage involves costs that are meaningful and should be fully understood before proceeding. These include:

Upfront Mortgage Insurance Premium (MIP)
FHA requires an upfront mortgage insurance premium at closing, calculated as a percentage of the maximum claim amount. This premium funds the FHA insurance that provides the non-recourse protection for both the borrower and any heirs.

Annual Mortgage Insurance Premium
An ongoing annual MIP accrues to the loan balance throughout its term, compounding the balance over time.

Origination Fees and Closing Costs
Standard closing costs – including origination fees, title, escrow, and appraisal – apply to HECM transactions, similar in structure to a traditional refinance.

Interest Accrual
Interest accrues on the outstanding balance continuously. Because no payments are required, the compounding effect of interest over an extended loan term can result in a loan balance that grows substantially relative to the original proceeds accessed.

Impact on Estate and Heirs
Because the loan balance grows over time and must be repaid when the borrower no longer occupies the home, a reverse mortgage reduces the equity available to heirs. Heirs have the option to repay the outstanding balance and retain the property, or to sell the home and apply the proceeds toward repayment. As noted above, the non-recourse feature ensures that repayment cannot exceed the home’s appraised value at the time of resolution.

— HIGH-VALUE PROPERTIES

HECM loans are subject to FHA lending limits, which cap the maximum claim amount that can be used in calculating available proceeds. For homeowners whose property value exceeds the applicable FHA lending limit, a proprietary jumbo reverse mortgage may provide access to greater equity than a standard HECM can accommodate.

Jumbo reverse mortgages are not FHA-insured and operate under the guidelines of private lenders rather than federal program standards. The structure, costs, and non-recourse provisions applicable to proprietary programs differ from HECM guidelines and should be evaluated specifically in the context of the borrower’s property value and financial objectives.

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— COMMON QUESTIONS