The loan, commonly known as HECM, is funded by a lending institution such as a mortgage lender, bank, credit union or savings and loan association. The program allows borrowers to borrow against the equity they have built up over the years in their home. Homeowners whose circumstances change can restructure their payment options at any time. Unlike ordinary home equity loans, a HECM does not require repayment as long as at least one borrower lives in the home.
Lenders recover their principle, plus interest, when the home is sold.
The remaining value of the home goes to the homeowner of their heirs. If the sales proceeds are insufficient to pay the amount owed, HUD-FHA will pay the lender the amount of the short fall. This is the advantage of the FHA insured HECM mortgage over other reverse mortgages, greater protection for the borrowers estate. The FHA collects an insurance premium from all borrowers to provide this coverage. The older the borrower the larger the percentage of the home that can be borrowed.