Good news! The Federal Housing Administration (FHA) lending limit for home-equity conversion mortgage (HECM) loans, commonly known as reverse mortgages, has increased from $726,525 to $765,600 for new FHA case numbers generated after Jan. 1, 2020. With the increase, more seniors, especially owners of higher-value homes, should be able to secure larger loan amounts from their HECMs.
Several factors determine a loan amount on an FHA-insured HECM. Three of the most important are: the age of the youngest borrower (or non-borrowing spouse), the expected interest rate (EIR) on the loan, and the appraised value of the home or FHA lending limit (whichever is lower). From these three factors, a maximum claim amount (MCA) is established.
If a house is appraised at $800,000 after Jan. 1, 2020, the FHA’s lending limit of $765,600 will be used as a starting point toward establishing the borrower’s ultimate payout. Next, the lender develops a principal limit factor (PLF) based on the youngest borrower’s age and EIR, and multiplies this number by the MCA to determine the gross principal limit (GPL).
At this point, the lender calculates closing costs to be subtracted from the GPL. These closing costs incluide an insurance premium (protecting both lender and borrower), an origination fee (that compensates the lender for expenses associated with originating the loan), and settlement costs (such as the cost of the appraisal, title insurance and other third-party fees).
These deductions establish the borrower’s net principal limit. Further deductions may be necessary if the borrower has a current mortgage that has to be paid off (a condition of all HECMs) or if the lender requires that a “life expectancy set-aside” (LESA) be established to ensure that the borrower has sufficient funds in place to maintain the property and pay ongoing property taxes and homeowner insurance. Some borrowers voluntarily elect to establish a LESA (behaves like an impound account), so they don’t have to worry about these future payments.
This leaves the remaining principal limit, which is the loan amount the borrower can expect to receive. The borrower can choose to receive this total as a lump sum (60 percent paid out the first year), over a period of years (term), for life (tenure), as a line of credit, or a combination of options that best fit their needs and goals.
I know there’s a lot to digest here, but for now just remember this one big takeaway: If you are an older American with home equity, you may have a powerful and available financial resource to help you retire better.
Stay tuned for more information in the coming months!
John Ruybalid is a reverse-mortgage professional with American Advisors Group. His office is in Santa Fe.