The U.S. Department of Housing and Urban Development has made several changes to the Home Equity Conversion Mortgage (HECM) program to strengthen the FHA Mutual Mortgage Insurance Fund (MMI or Fund) and protect the viability of the reverse mortgage program.

The changes affect the following requirements:

• Initial disbursement limits
• New Single Disbursement Lump Sum payment option
• Initial mortgage insurance premiums
• Initial mortgage insurance premium calculation for refinance transactions
• New Principal Limit factors
• Financial assessment requirements
• Funding requirements for paying property charges are based on the financial assessment.

Initial Lump Sum Limits

Effective for all Home Equity Conversion Mortgages, disbursements at loan closing, and within the first 12 months of closing, CANNOT EXCEED THE GREATER OF:

• 60% of the Principal Limit,

Or,

• Mandatory obligations plus 10% of the Principal Limit.

This pertains to ALL payment options, including lump sum, term, tenure, line of credit, modified term, and modified tenure.

Note: Borrowers with outstanding mortgages over 60% can still take the additional 10% if disbursements do not exceed the Net Principal Limit or Principal Limit.

IMPORTANT: If the borrower takes more than 60% of the Principal Limit, the cost of MIP increases significantly.  If the disbursement is 60% or less, MIP is 0.50 of the Principal Limit.  It increases to 2.00% if the disbursement exceeds 60%.  (Use the ARLO reverse mortgage calculator for a detailed cost quote.)

Mandatory Obligations

Mandatory obligations for traditional and refinance transactions include customary closing costs, any property liens, and so forth.

Note: Repairs are not mandatory obligations but do reduce the Principal Limit.  With HECM for Purchase transactions, the total amount of the purchase price is a mandatory obligation.

Note: Mandatory obligations (or “closing costs”) have remained relatively unchanged from previous requirements.

IMPORTANT: HECM purchases also require that borrowers meet all requirements for funding sources, gap financing, and so forth, as defined in Mortgagee Letter 2009-11.

First 12 Month Disbursement Limit

Mandatory obligations and required disbursements reduce the funds available to the borrower during the “First 12-month Disbursement Period.” Include the following items in initial MIP calculations and the disbursement limit for the first 12 months:

• Disbursement to the mortgagor at closing.
• Amount of mandatory obligations.
• Repair set-aside.

Note: Set-asides are deducted from the Principal Limit, and they lower the Net Principal Limit.

• Per mortgagee specifications, tax payments are due within 30 to 45 days of closing.

Note: If a new tax bill has not been issued, use the prior year’s amount plus 1.2%.

• Tax and insurance are scheduled for payment from the set-aside or the HECM proceeds within the first 12 months.
• An amount equal to 10% of the Principal Limit that the mortgagor has opted to have available and which was not taken at loan closing.

IMPORTANT: The servicing fee set aside is NOT included in the First 12 Month Disbursement Period or the initial MIP calculations.

Single Lump Sum Disbursements

Borrowers who select the lump sum disbursement method MUST take the full lump sum at closing or be unable to draw it at a future date.

However, they are not required to take the full 10% out at closing.  No remaining disbursements will be available throughout the lifetime of the loan.

The lump sum disbursement is limited to 60% of the Principal Limit or mandatory obligations plus 10% of the Principal Limit.  This option would most likely appeal to borrowers with higher mandatory obligations.

Note: This pertains to both ARM and fixed-rate loans.

Mortgage Insurance Premium (MIP)

Effective for all case number assignments on or after September 30, 2013, HECM Standard and HECM Saver initial mortgage insurance pricing options will no longer be available.

HUD will charge an initial mortgage insurance premium (MIP) of 0.50% of the Maximum Claim Amount (MCA) when the sum of the mortgagor’s initial disbursement at closing, plus other required or available disbursements during the First 12 Month Disbursement is 60% or less of the Principal Limit.

If the initial disbursement at closing, plus other required or available disbursements during these 12 months, are GREATER than 60%, HUD will charge an initial MIP of 2.00%.

Whenever the initial disbursement consists of the mandatory obligations plus 10% of the Principal Limit, the borrower must advise the mortgagee of what portion of the 10% they want and if the funds should be disbursed at closing or during the First 12 Month Disbursement period.

Note: Borrowers receive more than 60% of the Principal Limit when they request the full 10%, and their mandatory obligations are 51% of the Principal Limit or more.  If a borrower wishes to do this, you MUST advise them that the MIP rate increases from 0.50% to 2.0% of the Principal limit when disbursements exceed 60% of the Principal Limit.

The mortgagee then calculates the initial MIP based on the funds the borrower elected to have available during the first 12 months.

The existing annual MIP rate of 1.25% will continue to be in effect for all HECMs.

Example 1: Initial Disbursement BELOW 60%

• Maximum Claim Amount: $200,000
• Principal Limit: $100,000
• 60% of Principal Limit: $60,000
• Mandatory Obligations: $20,000
• Repair Set-aside: $0
• Cash to Mortgagor at Loan Closing: $20,000
• Initial Disbursement Limit Amount: $60,000
• Disbursement Amount at Closing: $40,000
• Initial MIP (MCA multiplied by 0.50%): $1,000

Note: If the mortgagor does not take cash at closing, additional draws during the First 12 Month Disbursement period cannot exceed $40,000 because the initial MIP was calculated for a disbursement below 60% of the principal limit.

Example 2: Initial Disbursement ABOVE 60%

• Maximum Claim Amount: $200,000
• Principal Limit: $100,000
• 60% of Principal Limit: $60,000
• Mandatory Obligations: $70,000
• Repair Set-aside: $1,000
• Cash to Mortgagor at Loan Closing: $9,000
• Initial Disbursement Limit Amount: $80,000
• Disbursement Amount at Closing: $80,000 (includes set-asides and mandatory obligations)
• Initial MIP (MCA multiplied by 2.00%): $4,000

IMPORTANT: Mandatory obligations between 51% and 60% of the Principal Limit, plus the allowable 10% disbursement, place the disbursement above 60% of the Principal Limit.  The higher MIP of 2.00% now applies.  Borrowers may prefer to receive a lower than 10% disbursement amount, so the MIP is lower.

Example 3: Mandatory Obligations of 60% or LESS of the Principal Limit

• Principal Limit: $200,000
• 60% of Principal Limit: $120,000
• Mandatory Obligations: $17,000
• Repair Set-aside: $33,000 (at loan closing or within the first 12 months)
• Cash to Mortgagor at Loan Closing: $70,000
• Initial Disbursement Limit Amount: $120,000 (includes $17,000 mandatory obligations)
• Initial MIP (MCA multiplied by 0.50%): $1,000

Note:  On the Single Disbursement Lump Sum Payment Option, the mortgagor is limited to a single draw at loan closing for the $70,000 that exceeds the Mandatory Obligations and set aside.

Example 4: Mandatory Obligations of 60% or MORE of the Principal Limit

• Principal Limit: $200,000
• 60% of Principal Limit: $120,000
• Mandatory Obligations: $140,000
• Repair Set-aside: $13,000 (at loan closing or within the first 12 months)
• 10% of Principal Limit: $20,000
• 60% of Principal Limit: $120,000
• Initial Disbursement Limit Amount: $120,000 (includes $140,000 mandatory obligations, $13,000 repair set-aside, and $7,000 to mortgagor)
• Initial MIP (MCA multiplied by 2.00%): $4,000

Note:  The borrower can draw $7,000 at closing or within the first 12 months.  The Single Disbursement Lump Sum Payment Option limits the mortgagor to a single draw at loan closing for the $7,000 that exceeds the Mandatory Obligations and set aside.

Principal Limit Factors (PLF)

Entities responsible for educating and informing prospective mortgagors about the HECM program requirements must use the new PLF table to calculate the Principal Limit and disclose the amount of proceeds that will be available.

The new PLF table is available at: https://www.hud.gov/offices/hsg/sfh/hecm/hecmhomelenders.cfm.

Credit Standing

Mortgagees must assess a potential mortgagor’s financial capacity and willingness to comply with mortgage provisions due to increasing tax and hazard insurance defaults by borrowers.

Effective for case numbers assigned on or after January 13, 2014, mortgagees must complete a financial assessment of all prospective borrowers before loan approval and closing.  This pertains to all reverse mortgage types, including traditional, refinance, and purchase.

Tax and Insurance set aside

All set-asides are withdrawn from the Principal Limit, lowering the Net Principal Limit and the funds available for disbursement.

If the mortgagee determines the borrower is a potential default risk, the lender can create a Lifetime Expectancy Set-aside (LE Set-Aside) to pay future tax and insurance (T&I) charges.  The amount of this set aside will be based on the life expectancy of the youngest borrower.

If set-aside funds run out, the borrower must continue to pay taxes and insurance with whatever funds are available.

Note: Borrowers who do not require a T&I set-aside can still request one or voluntarily authorize the mortgagor to pay property charges from a line of credit or by withholding monthly disbursements.

Disbursement Limit FAQs

ARLO recommends these helpful resources: 

• Reverse Mortgage Principal Limit & Maximum Claim Explained
• Reverse Mortgage Types: Lump Sum Payout -VS- Line of Credit