Reverse Mortgage Terms,
In Plain English

HECM Home Equity Conversion Mortgage

The official name for the FHA-insured reverse mortgage program. A HECM lets homeowners 62 or older convert part of their home equity into cash — as a lump sum, monthly payments, or a growing line of credit — without a required monthly mortgage payment. The borrower keeps the title and remains responsible for property taxes, homeowners insurance, and maintenance.

It is a loan — not a government benefit. Interest and fees accrue over time and the loan balance grows.

→ How a reverse mortgage works in South Dakota

HECM for Purchase H4P

A version of the HECM designed specifically for buying a new home. Buyers 62 or older make a down payment (typically 35–55% of the purchase price) and the HECM covers the rest — with no required monthly mortgage payment on the new home. Created by Congress in 2009 so seniors could purchase a new primary residence and obtain a reverse mortgage in a single transaction.

One of the most underused programs available to South Dakota homebuyers 62 and older — and one most realtors don't know about.

→ HECM for Purchase in Sioux Falls, South Dakota

Non-recourse loan

A loan where neither the borrower nor their heirs can ever owe more than the home is worth at the time of sale — regardless of how large the loan balance has grown. If the home sells for less than the outstanding balance, FHA mortgage insurance covers the difference. Your family will never receive a surprise bill.

This is one of the most important protections built into every HECM, and one of the most misunderstood.

→ Reverse mortgage myths South Dakota families believe

MIP Mortgage Insurance Premium

An FHA-required insurance fee on all HECM loans. Paid in two parts: an upfront premium of 2% of the home's appraised value at closing, and an annual premium of 0.5% of the outstanding loan balance. Both are typically financed into the loan rather than paid out of pocket. MIP is what funds the non-recourse guarantee — it is the mechanism that ensures heirs never owe more than the home is worth.

Principal Limit

The total amount you are eligible to borrow through a HECM. Determined by three factors: the age of the youngest borrower (older means more), your home's appraised value up to the FHA lending limit, and current interest rates. This is the pool from which your chosen payment option is funded.

→ How much can you get from a reverse mortgage in South Dakota?

PLF Principal Limit Factor

A HUD-published percentage — calculated from the youngest borrower's age and current interest rates — that is multiplied by the home's appraised value to produce the Principal Limit. As a general reference: borrowers in their late 60s to early 70s often have PLFs in the 40–55% range; borrowers in their late 70s and beyond may be higher. These percentages shift with interest rates and are recalculated at the time of application.

Your actual PLF is calculated precisely at the time of application. Jeff Buum runs exact numbers for every client at no cost and no obligation.

FHA Lending Limit

The maximum home value the FHA will use to calculate a HECM loan amount. If your home's appraised value is higher than this limit, the loan calculation is capped at the limit — not your full home value. This limit is set annually by HUD and applies to all U.S. counties uniformly. It is indexed to inflation and has increased in recent years, benefiting homeowners in rising markets like the Sioux Empire.

Confirm the current lending limit with Jeff Buum at the time of your consultation — it is updated annually.

HECM Line of Credit

A payment option where you draw funds as needed rather than all at once. The key feature: the unused portion of the line grows over time at the loan's interest rate — meaning the longer it goes untouched, the more becomes available. Often the most flexible and strategically valuable option for retirement income planning, because it creates an expanding reserve you can tap during market downturns, for healthcare, or as a bridge to delayed Social Security.

→ How a reverse mortgage fits into a South Dakota retirement plan

Tenure Payment

A HECM payment option that delivers equal monthly payments for as long as you live in the home as your primary residence — even if the loan balance eventually exceeds the home's value. FHA mortgage insurance covers the difference if that happens. Designed for borrowers who want a predictable, lifelong monthly income supplement.

Term Payment

A HECM payment option that delivers monthly payments for a fixed period you choose — five years, ten years, or any period that fits your plan. Monthly amounts are higher than tenure payments for the same loan amount, because the total is spread over fewer years rather than a lifetime. Stops at the end of the term, but you remain in the home; the loan becomes due only when you permanently leave.

Occupancy Requirement

The rule that a HECM borrower must live in the home as their primary residence. If the borrower permanently moves out, sells the home, or passes away, the loan becomes due and payable. Temporary absences — for medical care, travel, or a second home — are generally permitted; extended absences (typically more than 12 consecutive months) can trigger the due-and-payable clause.

Occupancy is what keeps the loan in good standing. It is not the same as being "locked in" — you can sell or move at any time; the loan simply becomes due when you do.

Financial Assessment

A lender review conducted before closing to confirm the borrower has the willingness and capacity to sustain ongoing property charges — property taxes, homeowners insurance, and home maintenance — over the life of the loan. Unlike a traditional mortgage, there is no minimum credit score or income threshold. The financial assessment looks at credit history, income, and assets in the context of those specific ongoing obligations.

If the assessment finds a concern, the lender may require a LESA (see below) rather than denying the loan outright.

LESA Life Expectancy Set Aside

A portion of the reverse mortgage proceeds set aside at closing to pay future property taxes and homeowners insurance on the borrower's behalf — directly to the taxing authority and insurer. Required when a financial assessment indicates the borrower may struggle to sustain those obligations independently. A fully-funded LESA is set aside for the borrower's full life expectancy; a partially-funded LESA requires the borrower to pay a portion themselves. The LESA reduces the net proceeds available at closing but protects the borrower from a default for non-payment of taxes or insurance.

HUD Counseling

Mandatory independent counseling every HECM borrower must complete with a HUD-approved housing counselor before the loan can close. The counselor has no affiliation with the lender, receives no commission, and is required by law to cover loan costs, alternatives to the reverse mortgage, and the borrower's rights and obligations. Sessions are typically conducted by phone and take 60–90 minutes. The borrower receives an eligibility certificate upon completion.

This is a consumer protection — not a sales step. Jeff Buum considers it one of the most important safeguards built into the HECM program.