HUD just announced that the current reverse mortgage loan limit for the HUD Home Equity Conversion Mortgage (HECM) will be raised from $726,525 to $765,600 effective January 1, 2020.

The HUD Mortgagee Letter announcing the increase, can be found on the HUD website here: https://www.hud.gov/sites/dfiles/OCHCO/documents/19-20hsgml.pdf .

After the limits remained unchanged for many years, this is the 4th year in a row where HUD has raised the lending limit.

It had remained stagnant at $625,500 since 2009 when the limits were originally raised from $417,000 as part of the American Recovery and Reinvestment Act.

Those limits were considered a temporary increase and for many years had to be renewed annually.

It was not until 2017 that increasing housing prices finally supported increases to the lending limits on their own based on HUD’s calculations.  Since then the limits have been (and will be):

History of HECM Reverse Mortgage Limits 

But what does this mean for borrowers? 

Without using a chart that shows all the years above and really getting into the weeds, the chart below demonstrates the difference a borrower with a home valued at $765,600 or more will receive with the new limits in 2020 vs what they received under the current 2019 limits:

2020 Reverse Mortgage Limits

AGE / LTV2020 Limits ($765,600)2019 Limits ($726,525)Difference
65 / 55%$421,080$398,862$22,210
70 / 58%$444,048$419,931.45$24,117
75 / 61%$467,016$440,274.15$26,742
80 / 64%$489,984$467,155.58$22,829
85 / 69%$528,264$499,849.20$28,415
(Table based on $765,600 or higher property value and illustrates amount of additional funds made available using new 2020 HECM lending limit. Rate used in illustration: 1.50% Annual Libor Margin)

The new limits show that borrowers between the ages of 65 and 85 of properties valued at $765,600 or more will receive anywhere from approximately $22,210 to $28,415 in additional proceeds.

This is always welcome news for borrowers of higher priced properties but HUD has already signaled that they may change the HECM program to institute regional limits so it remains to be seen how long the one national limit will remain in place.

HUD still considering regional limits in 2020 

If HUD puts in regional limits, there would no longer be one national limit and higher priced areas would have higher limits than areas with lower priced housing.

Regional limits are not new for the program.  Before HUD moved to one national limit in 2007/2008, HUD utilized regional limits in both their forward and reverse mortgage programs.

(We have written about this practice in a recent forbes article.)

It is our contention that rather than limits placed based on area property values, we believe that if HUD believes that different limits are in order, HUD should consider placing limits based on regional historical appreciation rates.

HUD gives the same loan limits as a percentage of value to all properties, regardless of whether those properties typically experience similar rates of property value appreciation.  This is true regardless of the value, and regardless of at what value they set the limit.

In other words, borrowers with properties that never really grew in value, for example, would get the same 60% starting loan as a percentage of the total value of the property as a borrower who had a home that experienced 5 – 7% appreciation every year.

If both borrowers extracted the same amount of equity from their homes, lived in the property comparable times and accrued similar interest, the loan on the properties that never experience any appreciation would be the one most likely to experience the greatest loss (all other things being equal).

And quite often, those same properties fall well below the loan limits that HUD set so just lowering the lending limit does not seem as though it will lower the potential losses.

Lowering the loan limit will not lower the exposure to HUD if the starting or ultimate loan to value is still too high as a comparison to the amount the property will be worth in the future.

Granted, no one really knows how much appreciation any property will experience but we certainly know from historical data what areas of the country appreciate at a greater rate.

Even higher limits available for 2020 Proprietary & Jumbo products 

We do not have all the data that HUD has to review, so it is only our unproven belief based on the experience of the loans we routinely originate now that simply lowering the loan limits will give HUD substantially the same properties they now receive and will only affect some of the higher values in certain areas, and not necessarily the ones that would experience the greatest percentage of loss.

Nevertheless, sometime in 2020 we may see that HUD institutes regional limits that will lower the maximum lending limits in some areas in their further attempts to mitigate the losses the program has experienced (which are down considerably already with the changes made so far).

But for the time being, borrowers with higher values can take advantage of the raised 2020 HECM limits.

And borrowers can also take heart that proprietary or jumbo programs (often also called jumbo reverse mortgages) are improving constantly and their minimum limits have come down substantially so there will be other options available as well.

Top 5 FAQs

How much did the limit increase for 2020?

The FHA reverse mortgage limit has been increased from $726,525 to $765,600 which is an increase of $39,075.  The limit on a reverse mortgage is the maximum home value that the loan to value percentage can be applied to.  For example, if your home appraised for $775,000 the loan to value you can borrow would be applied to $765,600.

 

What is the maximum you can borrow on a reverse mortgage?

The maximum amount that you can borrow on a reverse mortgage loan depends on the age of the youngest borrower/spouse and the interest rate available.  The older you are the more you can borrow.  The FHA HECM program tops out at 75% max loan to value at around 93 years of age or older.

Will mortgage rates go down in 2020?

While it is impossible to predict where interest rates will go in 2020, the Fed has indicated a desire to keep rates low in 2020 barring any significant inflation.

What is principal limit on a reverse mortgage?

The Principal Limit is the initial loan amount that is available to a borrower on a reverse mortgage at the time the loan is taken out.  It is determined by the Age of the youngest borrower/spouse, interest rate and home value or lending limit (whichever is less).

Are there any changes for Condominiums in 2020?

HUD made changes to the Condominium rules in 2019 allowing for single unit approvals.  At this time, there are no further changes expected or announced by FHA regarding Condominiums.