If you’re in the process of applying for a reverse mortgage, or if you have been considering tapping into your home equity with a government insured Home Equity Conversion Mortgage (HECM) loan, a recent change may mean you can qualify for more loan proceeds. HUD surprised everyone with a Mortgagee Letter of the changes at the very end of June and then had an industry-wide conference call on July 2, 2014 to explain to lenders how the changes would work.
The Federal Housing Administration, under its HECM program, offers government-insured reverse mortgages for borrowers who are 62 and older and who meet certain home equity requirements.
The FHA deems the amount of proceeds for which borrowers are eligible through calculations that include the borrower’s age, interest rates, and the amount of home equity the prospective borrower has.
That amount, or the “principal limit” for the loan, is based on a set of “principal limit factors” FHA adjusts from time to time.
Its most recent set of principal limit factor changes are resulting in more potential proceeds for almost all borrowers under current interest rates.
FHA basically shifted its principal limit factors so that at current interest rates, they are more favorable for borrowers at the older end of the spectrum. For borrowers who are 64 or older, with all other factors (home value, interest rates) being equal, the amount they can qualify for starting August 4 will be greater than the amount they could borrow under the old tables.
However, it’s important to note that the conditions are more favorable under today’s interest rates, which are hovering near historic lows. This is a very important distinction, especially with today’s economic data which really helped the stock market but not the bonds and interest rates.
Reverse mortgage market analysts have indicated that the conditions will become less favorable the higher rates rise, making the HECM program more sensitive to interest rate increases than it has been historically. What that means is that borrowers who get their reverse mortgages now before rates go up, will get even more money than those who will be cut back even further when the rates do rise under the new calculations.
Why the change?
The Department of Housing and Urban Development recently updated its policy regarding non-borrowing spouses of reverse mortgage borrowers. Now, non-borrowing spouses can receive additional protections allowing them to remain in the home, even when the borrowing spouse has passed away, provided certain conditions are met when the loan is closed, and throughout the course of the loan.
The new borrower amounts are designed to include non-borrowing spouses who do not meet the minimum age requirement of 62. In the process of adding those ages, however, FHA changed the amounts for all borrowers.
How much are loan amounts impacted?
Under a basic scenario with a home valued around $250,000 and no mortgage, a 70-year-old borrower at an interest rate of 5% can qualify for 1.2% more, or $3,000 more than under the previous guidelines, according to Ibis Software. For a borrower who is 80 years old, the difference increases 4.7% more, or $11,750 in additional proceeds.
For a 90-year-old borrower, the difference is more than $22,000, or 9%.
2018's Reverse Mortgage Principal Limit Factors
|Age of Borrower||Percentage of Home Value||Home Value $200,000||Home Value $300,000||Home Value $400,000||Home Value $500,000||Home Value $600,000|
PLF tables source: https://www.hud.gov/sites/documents/august2017plftables.xls
The difference varies depending both on age and interest rate. At even 1% higher interest rates, borrowers will actually qualify for less.
What does it mean for me?
If you have been considering a reverse mortgage and you are at least 64 years old, it’s good news for you since it means you will qualify to receive more proceeds than you would have prior to the changes.
Even if you have started the application process but have not yet closed the loan, you are eligible for the new borrower amounts.
As rates rise, however, the amount you can qualify for is likely to decrease. In a rising interest rate environment, it may be more beneficial for you to get a reverse mortgage today, rather than waiting for the chance to rates to go up.
If you have a question about how the changes will impact your situation, or if you would like to learn more about getting a reverse mortgage, contact us for more information.
All Reverse Mortgage® If you are interested in a quote on the new principal limits please call us Toll Free (800) 565-1722 or try our free online calculator.