Reverse Mortgage (HECM) Rules
A reverse mortgage — formally the Home Equity Conversion Mortgage (HECM), authorized under 12 U.S.C. § 1715z-20 and insured by FHA — allows homeowners age 62 or older to convert home equity into tax-free cash without selling the home or making monthly mortgage payments. Instead of the borrower paying the lender, the lender pays the borrower — as a lump sum, monthly payments, or a line of credit — while the loan balance grows over time. The loan doesn't come due until the borrower sells the home, moves out permanently, or dies; at that point, the home is typically sold to repay the balance. A critical protection: the HECM is non-recourse — neither the borrower nor their heirs will ever owe more than the home's appraised value at repayment, even if the loan balance has grown to exceed it (FHA insurance covers the shortfall). The maximum borrowing amount depends on your age, home value (up to FHA's lending limit of ~$1,209,750 in high-cost areas in 2026), and current interest rates. Reverse mortgages carry high upfront costs (mortgage insurance premiums, origination fees) and reduce the equity heirs inherit. HUD-approved counseling is mandatory before closing — a consumer protection built into the program to ensure borrowers understand the long-term implications.
Current Law (2026)
Home Equity Conversion Mortgages allow homeowners age 62+ to convert home equity into cash (lump sum, line of credit, or monthly payments) without monthly mortgage payments.
| Parameter | Value |
|---|---|
| Minimum age | 62 |
| Property | Primary residence |
| Loan limit | FHA lending limit (~$1,209,750 for 2026) |
| Proceeds | Based on age, interest rate, and home value |
| Repayment | Due when borrower dies, moves, or sells |
| Non-recourse | Borrower/heirs never owe more than home value |
| Upfront MIP | 2% of appraised value |
| Annual MIP | 0.5% of outstanding balance |
Legal Authority
- 12 U.S.C. § 1715z-20 — Home Equity Conversion Mortgages (HECM): authorizes FHA to insure reverse mortgages for homeowners 62+; sets program parameters including non-recourse protection, required counseling, and mandatory property tax/insurance obligations
- 12 U.S.C. § 5602 — CFPB reverse mortgage study: Bureau must study reverse mortgage transactions and may issue rules or restrictions if needed to protect consumers
- 12 U.S.C. § 2601-2607 — RESPA protections: closing disclosures, kickback prohibitions, and escrow requirements apply to reverse mortgages as federally related mortgage loans — see RESPA
How It Works
A HECM under 12 U.S.C. § 1715z-20 works by accumulating debt rather than paying it down — you receive payments (or a line of credit to draw from), and the outstanding balance grows over time with accruing interest and FHA mortgage insurance premiums. No monthly payments are required: the loan doesn't become due until the last borrower dies, sells the home, or permanently moves out (defined under 24 CFR § 206.27 as 12 consecutive months away from the property). During the loan's life, the borrower must continue paying property taxes, homeowner's insurance, and maintenance; failure to do so is a default trigger that can make the loan immediately due. Proceeds can be structured as a lump sum, monthly tenure payments (for as long as you live in the home), monthly term payments (for a fixed period), a line of credit, or any combination of these.
The HECM's most important protection is its non-recourse guarantee: if the loan balance grows to exceed the home's value at repayment — which happens when the borrower lives a long time, interest rates are high, or home values fall — neither the borrower nor the heirs owe the difference. FHA insurance (funded by the 2% upfront MIP and 0.5% annual MIP) covers any shortfall. The line of credit option has a feature worth understanding specifically: the unused portion of the credit line grows at the same rate as the loan balance (currently roughly 6–8%/year depending on rates). A $200,000 line of credit left untouched for 10 years might grow to $370,000+ in available credit — not as an investment return, but as an increase in available borrowing capacity. This makes the HECM line of credit a potentially powerful longevity and healthcare cost buffer when opened early and drawn upon only when needed.
Before any HECM can close, HUD-approved counseling is legally required under 24 CFR Part 206, Subpart E — the borrower must receive a certificate from an independent HUD-approved counselor demonstrating they understand the product's cost structure, non-recourse guarantee, and alternatives. Lenders also conduct a financial assessment to evaluate the borrower's ability to pay property taxes and insurance going forward; if the assessment raises concerns, the lender is required to set aside a portion of the HECM proceeds in an escrow-like account to cover those obligations, reducing the cash available to the borrower.
How It Affects You
If you're a retiree considering a HECM: Before applying, HUD-approved counseling is legally required — you cannot close a reverse mortgage without a certificate from an independent counselor. Find a counselor through HUD's official locator at hud.gov/program_offices/housing/sfh/hecm/hecmlist or by calling 1-800-569-4287 (HUD Housing Counseling hotline). Counseling typically costs $125 or less and takes about 90 minutes. On a $500,000 home at age 70 with 2026 interest rates around 7%, you might access $200,000-$240,000 through a HECM — the "principal limit factor" (a HUD table based on age and rate) determines the maximum. The line of credit option is worth understanding specifically: unused credit grows at the same rate as loan interest accrual, which means a $200,000 line of credit you don't touch for 10 years may grow to $370,000+ in available credit at 7% annual growth — a meaningful income buffer against future healthcare costs or longevity risk.
If you're considering using a HECM to delay Social Security: For a married couple where the higher earner's Social Security benefit at age 70 is $3,800/month vs. $2,660 at full retirement age (67), delaying costs 3 years of foregone benefits (~$95,760) but buys an extra $1,140/month for life — breaking even in 7 years and generating over $200,000 in additional lifetime benefits for a 20-year life expectancy after age 70. Using $60,000-$80,000 in HECM line of credit to bridge 3 years while delaying Social Security is a well-supported strategy for homeowners with sufficient equity. The HECM interest that accrues on amounts drawn is not deductible until the loan is repaid — don't confuse the HECM's tax-free character (loan proceeds are not income) with the limited tax deductibility of the accruing interest.
If a parent with a HECM dies and you're the heir: The lender will notify you that the loan is due and payable. You typically have 6 months to repay the loan balance, sell the home, or request an extension — and HUD guidelines require servicers to grant up to two 3-month extensions for heirs actively working toward resolution. If the home is worth more than the loan balance, sell it and keep the difference. If the loan balance exceeds the home's current value, you owe nothing — the HECM's non-recourse guarantee means FHA covers the shortfall, and you can complete a short sale or deed-in-lieu to satisfy the lender at no personal cost. Contact the HECM servicer immediately after death to notify them and begin the timeline — delays can complicate the process, as servicers initiate foreclosure if the due-and-payable event isn't resolved. HUD's HECM Servicer Network maintains the process; for guidance, visit hud.gov/program_offices/housing/sfh/hecm.
If you're evaluating whether a HECM makes financial sense: The upfront costs are substantial and worth modeling explicitly. On a $500,000 home: 2% upfront MIP = $10,000; origination fee (capped at 2% of first $200K + 1% above, max $6,000) = $5,500-$6,000; title, appraisal, recording, and other closing costs = $3,000-$5,000. Total initial costs: approximately $18,000-$21,000, plus the ongoing 0.5% annual MIP that accrues on the growing loan balance. Over 15 years, the total cost of a HECM on a $500,000 home (including MIP, interest at 7%, and initial fees) can easily reach $300,000+ — money that would otherwise be equity for heirs. A HECM makes sense when: you plan to stay in the home for many years, you have limited other liquid assets, and the alternative is selling the home or taking on riskier debt. If you only need funds for 2-3 years or expect to sell the home soon, a HELOC or downsizing may be more cost-effective.
Implementing Regulations
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24 CFR Part 206 — Home Equity Conversion Mortgage Insurance — the HUD/FHA regulation governing the full lifecycle of HECM loans, from origination through insurance claim. Key provisions across the Part's five subparts:
- §§ 206.1–206.3 — Subpart A (General): § 206.1 — statutory authority is § 255(a) of the National Housing Act (12 U.S.C. § 1715z-20); § 206.3 — the "maximum claim amount" (the insured ceiling for each loan, equal to the lesser of appraised value or the national FHA lending limit, currently ~$1,209,750) is the foundational concept anchoring every downstream calculation — MIP rates, assignment thresholds, claim limits
- §§ 206.13–206.51 — Subpart B (Eligibility; Endorsement): § 206.13 — lenders must inform borrowers at initial contact of all HECM disbursement options (tenure, term, line of credit, lump sum, and combinations); § 206.19 — disbursement options for adjustable-rate HECMs: tenure (equal monthly payments for life), term (equal monthly payments for fixed term), line of credit, or combinations; § 206.26 — maximum principal limit tied to age of youngest borrower, expected interest rate, and maximum claim amount; § 206.27 — "due and payable" triggers: borrower's death, sale of property, 12 consecutive months out of the home, failure to pay taxes/insurance, or property in disrepair
- §§ 206.103–206.133 — Subpart C (Contract Rights and Obligations): § 206.103 — mortgage insurance premium (MIP) payments; § 206.105 — initial MIP ≤ 3% of maximum claim amount; monthly MIP accrues daily at ≤ 1.50% of remaining insured principal balance (up to 1.55% for high-LTV loans); initial MIP due within 15 days of closing; § 206.107 — lender election: "assignment option" (assign mortgage to HUD when loan balance reaches 98% of maximum claim amount) or "shared premium option"; § 206.121 — when lender fails to make required payments to borrower, HUD steps in and demands reimbursement or assignment within 30 days; § 206.123 — insurance claim submission triggers: assignment, lender default, short sale (§ 206.125(c)), foreclosure; § 206.125 — property acquisition and sale procedures: lender must notify HUD within 60 days of due-and-payable event; estate/heirs given 30 days to pay off or sell the home at ≥ 95% of appraised value to extinguish the debt without a deficiency; § 206.129 — claim payment limited to the maximum claim amount; § 206.133 — insurance contract terminates on full payoff, claim payment, or when lender fails to comply with HUD demand
- §§ 206.200–206.211 — Subpart D (Servicing Responsibilities): servicers must maintain the property and ensure taxes and insurance are paid; mandatory set-aside accounts when borrower financial assessment raises concerns
- §§ 206.300–206.310 — Subpart E (HECM Counselor Roster): HUD-approved counselors must complete HECM-specific training and appear on HUD's national HECM Counselor Roster; § 206.309 — counselors are prohibited from providing counseling if they have a financial interest in the loan or a business relationship with the lender
24 CFR Part 206 is the operational backbone of the HECM program — it specifies the economic constraints (maximum claim amount, principal limit factors, MIP rates) that determine how much money a borrower can access, the life-event triggers that make the loan due, and the legal machinery that protects HUD's insurance fund when loans eventually unwind. The 98%-of-maximum-claim-amount assignment threshold (§ 206.107) is the key risk backstop: it allows lenders to transfer deeply seasoned loans to HUD before the insured balance exceeds the home's value, preventing lender losses while keeping FHA's mutual mortgage insurance fund actuarially stable. The estate's right to sell at 95% of appraisal (§ 206.125) is the practical protection against heirs facing a deficiency after a borrower's death — the HECM's non-recourse feature is implemented through this provision, not the statute alone.
Pending Legislation
- HR 7755 — Directs the Secretary of HUD to submit a report to Congress on the state of the reverse mortgage market. Status: Introduced.
Recent Developments
- HECM lending limit increase: The FHA lending limit for HECMs rose to approximately $1,209,750 for 2026, following the national conforming loan limit. This increase allows homeowners with higher-value properties to access more equity through the program — though the effective proceeds still depend on age and interest rates.
- Higher interest rates reduce proceeds: With rates elevated in 2025-2026, the amount available to HECM borrowers has decreased compared to the low-rate environment of 2020-2021. Higher rates mean a larger portion of the home's value is consumed by projected interest accrual, leaving less for the borrower. A 70-year-old with a $500,000 home might access $50,000-$75,000 less at 7% rates than at 3% rates.
- HECM volume declining: Total HECM endorsements have declined from pandemic-era highs as higher rates reduce the appeal of reverse mortgages and rising home values give retirees more options (home sale, downsizing, HELOC). The industry is lobbying for program improvements to reverse the trend.
- Financial assessment requirements tightened: FHA has maintained the financial assessment requirement introduced in 2015, evaluating borrowers' ability to pay property taxes and insurance. Borrowers deemed unable to meet these obligations face mandatory tax and insurance set-asides from HECM proceeds, reducing available funds. This requirement has been credited with reducing HECM defaults but criticized for restricting access for lower-income retirees who need the proceeds most.