If I do a reverse mortgage, can I pull all the money up front as a lump sum or do I have to have a line of credit, and is there cost to pulling out all the money up front?

Hi David,

HUD changed the program a little while back so that borrowers are capped at what they can pull from the home based on bona fide property charges that they have to pay with the loan.  The bottom line is that borrowers who need all their funds to pay off an existing mortgage* or are using it to purchase a new home can still use the entire amount of the reverse mortgage proceeds from the very start.  However, those who do not need all the funds to pay off existing loans and the costs of the reverse mortgage (what HUD now calls Mandatory Obligations), are limited to 60% of the Principal Limit or the amount required to pay the Mandatory Obligations plus 10%, whichever is greater.

What this means in plain English is that if your reverse mortgage proceeds are $100,000 and you have no liens against your home, you would be limited to $60,000 at the close of the loan and from that the cost of the loan would be taken.  If you had a current loan to pay off of $55,000, then you would be allowed to take an amount equal to the mandatory obligations ($55,000 plus the cost to get the loan) plus 10% in additional loan proceeds.  However, if the initial loan balance is over 60% of your Principal Limit or $60,000 when you add the additional 10% cash, it will cost you in additional mortgage insurance premium you have to pay up front so it is important to watch this if you want to keep costs down and you are close.

Using the reverse mortgage as a line of credit, anything that HUD does not let you take in the initial draw, you can take after the 1st year.  So literally on day 366 and beyond the remainder of the funds are available to you on the line of credit so if you can limit yourself to the 60%, you can also limit your fees.  On the fixed rate option though, anything you can’t take in the initial draw you will lose.  Because the fixed rate loan is a closed-end instrument, there are no further draws available after the initial draw at closing.  Therefore, borrowers who have large lines of credit available to them typically opt for the line of credit program now so that they can access all of their funds and not lose those funds that HUD does not make available until the 2nd year.

So the bottom line is you can use either program to access up to 60% of your principal limit if there are no liens or the balances are low and you can use either program to access up to 100% of your proceeds to pay off exiting liens.  However, if you have a small balance to pay off and will be restricted by the HUD 60% maximum draw in the first year, only the line credit program will give you access to the additional funds after the initial draw.

*Under HUD’s new guidelines, mortgages to be paid off with reverse mortgage proceeds must be at least 12 months old.

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Additional resources:

2014 Reverse Mortgage Payment Plans: Lump Sum vs Credit Line

FHA May Soon Discontinue Reverse Mortgage Lump Sum Payout