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.

Lump Sum Limits for Home Equity Conversion Mortgages (HECMs)

For all HECM loans, disbursements at loan closing and within the first year are limited to the higher of:

• 60% of the Principal Limit, or
• Mandatory obligations, plus an additional 10% of the Principal Limit.

This applies to all disbursement methods: lump sum, term, tenure, line of credit, modified term, and modified tenure.

Exception: Borrowers with existing mortgages exceeding 60% of the Principal Limit may access up to an additional 10%, provided the total disbursement doesn’t surpass the Net Principal Limit.

Caution: Exceeding 60% of the Principal Limit increases Mortgage Insurance Premiums (MIP). For disbursements at or below 60%, MIP is 0.50% of the Principal Limit. It rises to 2.00% for disbursements above 60%. For precise cost estimations, utilize our reverse mortgage calculator.

Understanding Mandatory Obligations in HECM Transactions

Mandatory obligations in traditional and refinance reverse mortgage transactions cover customary closing costs and existing property liens.

Key Points:

• Repairs, while not classified as mandatory obligations, will reduce the Principal Limit.
• In HECM for Purchase transactions, the entire purchase price is considered a mandatory obligation.

Additional Information:

• The nature of mandatory obligations, often referred to as ‘closing costs’, has largely remained consistent with previous guidelines.

Important Notice for HECM Purchases: Borrowers must comply with all stipulations regarding funding sources and gap financing as outlined in Mortgagee Letter 2009-11.  This includes adherence to specific requirements for HECM purchase transactions.

Guidelines for the First 12-Month Disbursement Limit in HECM Loans

During the first 12 months after closing a Home Equity Conversion Mortgage (HECM), the amount available to the borrower is adjusted based on mandatory obligations and required disbursements.  This period is known as the ‘First 12-month Disbursement Period.’ The following are included in the initial Mortgage Insurance Premium (MIP) calculations and the disbursement limit for this period:

1. Disbursement to the borrower at closing.
2. Amount allocated for mandatory obligations.
3. Funds set aside for repairs (Repair set-aside).

Noteworthy Points:

• Set-asides, while deducted from the Principal Limit, reduce the Net Principal Limit.
• According to mortgagee guidelines, property tax payments are due within 30 to 45 days post-closing. If a new tax bill is unavailable, the calculation should be based on the previous year’s amount, increased by 1.2%.
• Within the first year, tax and insurance payments are planned to be made from either the set-aside or the HECM proceeds.
• An additional amount, up to 10% of the Principal Limit, is not accessed at loan closing but opted by the mortgagor to be available.

Important Clarification: The servicing fee set-aside is excluded from both the First 12 Month Disbursement Period and the initial MIP calculations.

Rules for Single Lump Sum Disbursements in HECM Loans

For borrowers opting for the lump sum disbursement method in Home Equity Conversion Mortgages (HECMs), it’s crucial to understand the rules:

1. The entire lump sum must be taken at closing. If not fully withdrawn, then the remaining amount cannot be accessed in the future.
2. Borrowers are not obligated to take the additional 10% of the Principal Limit at closing.
3. Once the lump sum is disbursed, no further funds will be available for the duration of the loan.

Limits on Lump Sum Disbursement:

• The maximum amount for the lump sum is capped at either 60% of the Principal Limit or the sum of mandatory obligations plus 10% of the Principal Limit.
• This option is particularly beneficial for borrowers who have higher mandatory obligations.

Applicability:

• These guidelines are applicable to both Adjustable Rate Mortgage (ARM) and fixed-rate HECM loans.”

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