Reverse Mortgage Principal Limit & Maximum Claim Explained

August 10, 2021

I am 87 and received a HECM Loan. The maximum claim is $250,000. Due to age and other factors, the credit limit was due to reach the maximum claim in 2012. Withdrawals were denied beginning in June 2010, when the balance was around $225,000, and no withdrawals have been allowed since the servicer has been getting compound interest each month. HUD has been accessing fees and premiums. Correspondence with the servicer and HUD got a big SORRY. Maybe I’m delusional, but something doesn’t add up here. Am I wrong?

Without seeing your closing documents or even your Loan Comparison Page, I can only guess what is going on here but let me take a stab at it, and if this does not seem to come anywhere near your circumstances, please feel free to contact me. I would be happy to go over your individual information with you.

Firstly, there are a lot of terms with a reverse mortgage that is not like or even used in a standard or forward mortgage. You use the term “Maximum Claim” and give $250,000. The Maximum claim on the reverse mortgage in 2021 would have been the lower property value or the HUD lending limit, not the maximum amount you can borrow.

We now know that the “temporary increase” because of the American Recovery and Reinvestment Act of 2009 remained in effect until property values increased enough so that the HUD limit grew above and beyond this level with home appreciation to the current level of $970,000. It is set to increase again in 2023 to $1,089,300.

But again, those are the maximum claim amounts and not the loan amounts that borrowers receive when they get their loans, and it is not the maximum your property can be valued to be eligible for the loan. Your home can be valued higher, but that is the most that will be considered for the reverse mortgage benefit or loan amount.

If you had a Maximum Claim of $250,000 at the time you took out your reverse mortgage, that would mean that your property either appraised for that amount or that was the HUD maximum for your area at the time (if your loan closed before the nationwide move to a $417,000 maximum claim amount).

What is the Principal Lending Limit?

The benefit amount or your loan amount is also known as the Principal Lending Limit, and this is the amount you receive based on your parameters.

From this Principal Lending Limit, you would subtract any mortgage or other liens you had to pay off, any costs you incurred for the loan, and the remaining funds would be available for you to take as a lump sum, as a monthly distribution, to leave in a line of credit and take as you desire or as a combination of any or all of those options.

Depending on how quickly you used the loan in the early stages, the balance available grew over time on the unused portion. This growth of the line allowed you to ultimately borrow more total dollars than if you had borrowed all your available funds at one time…although even with the growth in the line of credit, you may not be able to borrow to your Maximum Claim Amount.

Just for the record, though, I have seen several simulators where the funds available to the borrower exceeded the original maximum claim amount, but that was in the case of borrowers who had no liens to pay off and allowed the line to grow for 6 to 7 years with no draws whatsoever.

2023's Reverse Mortgage Age Chart

Age of Borrower	Principal Limit Factor	Current Lending Limit
62	35.1%	$1,089,300
65	37.2%	$1,089,300
70	40.9%	$1,089,300
75	43.8%	$1,089,300
80	48.2%	$1,089,300
85	54.4%	$1,089,300
90	61.4%	$1,089,300

*Principal Limit Factors taken from HUD.gov using example expected rate of 6.180%. You must deduct reverse mortgage costs including upfront insurance (approx. 3%) to arrive at your NET principal limit.
PLF tables source: https://www.hud.gov/sites/documents/august2017plftables.xls

The amortization schedule you received with your loan when you first signed your documents would have shown you how long the line would last and how the balance would rise, but only if you advised your lender how much you planned to draw yearly so they could run that number for you.

Otherwise, the system cannot account for draws and numbers about which it has no information. Without knowing how much you owe on current liens at the time and how much you drew from the loan annually, I could not give you a helpful comment on whether, realistically, there would be any money left on the original line.

However, I may be able to offer a ray of hope. As I told you, HUD has raised the Lending Limit (or Maximum Claim Amount) to a current limit of $1,089,300 starting in January 2023.

I don’t know the value of your home currently, but many houses have seen significant amounts of appreciation since 2006. If you live in an area that has experienced growth in real estate values in the past 18 years, you may have an excellent opportunity to tap back into that appreciation.

This is especially true if your home was worth more than the Maximum Claim Amount when you did your first loan. In those cases, borrowers could not use all their equity on the first loan since the house was worth more than the lower HUD maximum claim amount.

If these circumstances are true for you, you may be an ideal candidate for a HECM to HECM refinance. If you did a loan with a monthly servicing fee or a higher mortgage insurance renewal premium, you could also eliminate that fee or lower that premium.

Refinance Eligibility

To be eligible, HUD requires you to receive at least 5 times the loan cost in new benefits with the new loan.

You do not have to re-pay any mortgage insurance premium that you have already paid (as long as this is your first refinance), so if your property is worth more now or if you did receive lower benefits before due to the HUD lending limits in different areas, you might qualify for a refinance at reduced costs. You may be able to get more benefits that way.

If you live in an area where the third-party costs are about $3,000, and your additional mortgage insurance premium runs another $2,000 based on the increase, you must net at least $25,000 from the new loan to be eligible.

It will not work for all borrowers, and the 5 times rule is a bit tougher for a reason. That way, people will not try to get seniors to refinance loans for a small return. But the refi does help many borrowers, and you may want to investigate it.

If you decide to check into it, you can speak to a reverse mortgage specialist who can look up property values in your area, look at your most recent statement and see if a refinance is possible.

Principal Limit FAQs

What is the principal limit on a reverse mortgage?

The principal limit is essentially the loan amount on a reverse mortgage. It is the total amount of money available to borrowers based on their specific loan parameters.

Who sets the principal lending limit factors? (PLF)

HUD determines the principal limit factors if it is a Home Equity Conversion Mortgage (HECM). The lender only sets the principal limit factor if it is a Non-HUD insured Proprietary reverse mortgage.

How is the reverse mortgage principal limit calculated?

3 pieces of information determine the principal limit factor. For a Home Equity Conversion Mortgage (HECM), those are the Home Value (or Max Claim), whichever is less, the expected interest rate, and the age of the youngest borrower or spouse. The higher the value and the older you are, the higher the percentage of the principal limit factor will be. However, the higher the expected rate, the lower the principal limit factor. For proprietary products, the same 3 items factor into the calculation. The only difference is the higher the interest rate, the higher the principal limit factor on proprietary products.

What percentage of equity can you get on a reverse mortgage?

The percentage of equity you can get from a reverse mortgage will depend on the age of the youngest borrower or spouse, interest rates, and product type. The older you are, the higher the percentage for all product types. On the Home Equity Conversion Mortgage (HECM) program, the percentage ranges from 38% (Age 62) to as high as 72% (Age 96+) at current interest rate levels as of December 2022 but can go lower if there is a spouse who is younger than 62. However, when rates reach the floor for the HUD calculator, which they did as recently as 2021 and could do again in the future, the percentage ranges from 52% (Age 62) to as high as 75% (Age 92+). On Proprietary products, the percentage ranges from as low as around 29% (age 55) to as high as 51% (Age 87+).

What is a reverse mortgage maximum claim?

The reverse mortgage maximum claim is the cap on the value that can be used to calculate your principal limit. As of January 2023, the maximum Home Equity Conversion Mortgage (HECM) claim is $1,089,300. If you have a home value of $1,200,000, the principal limit will be determined using a value of $1,089,300. For proprietary products, the maximum claim is simply the home value, as the HECM limit does not cap them, and therefore, these products are popular for those with home values above the government limit.

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14 Comments on this Article

John
October 23rd, 2023

Mr. Auerswald, I am still a little confused about MCA. We all know that once 98% of MCA reached, investor can assign the mortgage back to HUD. However, what is MCA really mean here? I know on mortgage document, the maximum principal amount usually 1.5 times of appraisal value. Is this maximum principal amount MCA? Would you mind clarify for me? Thanks, John
Reply to John
- ARLO™
  October 26th, 2023
  
  Hello John,
  
  98% of the Maximum Claim Amount referred to is the maximum amount that HUD will insure on the loan before the lender must assign the servicing and the loan to HUD. That Maximum Claim Amount is the cap on the value that HUD will allow the lender to use to determine the loan amount for borrowers on a reverse mortgage. So when the outstanding balance of a reverse mortgage approaches 98% of the original Maximum Claim Amount, the loan is assigned back to HUD. For example, HUD uses the property value or the maximum claim amount to determine the amount of money the borrower will receive based on the calculator for their circumstances. The loan amount available is known as the Principal Limit and is only a percentage of the Maximum Claim Amount that rises as borrowers age. That maximum claim amount now stands at $1,089,300. This means that if your home is worth up to $1,089,300, the maximum claim amount is the value of your home at the time the property is appraised, but if your home were worth more than $1,089,300 (i.e., $1.200,000), the HUD cap on that maximum claim amount would be $1,089,300 and that would be the amount that would be used in conjunction with the borrowers age(s) and interest rates to determine how much money the borrower(s) would receive with their reverse mortgage.
  
  For argument's sake, let's say the borrower receives $400,000 on a $1,000,000 property due to their age in today's market. The Maximum Claim Amount is $1,000,000; the Principal Limit is $400,000, and the loan documents will show a face amount of $1,500,000. The 98% rule is a rule that HUD has for lenders that says that the lender must assign the servicing to HUD if the loan to value reaches 98% of the original loan to value to protect their ability to receive claim payment. This is strictly between HUD and the lender, and lenders routinely make the assignment to HUD to avoid risking their insurance against the risk of loss. This loan must be assigned to HUD only when the outstanding balance reaches $980,000.
  
  The 1.5 times the value or 150% that you see on your loan documents is what HUD requires for states that require an amount to show on the loan documents. HUD would prefer that there is no mortgage amount on the loan documents because they do not know in advance what your balance may be in the future. After all, the balance can rise with interest accrual, and you have access to more money over time with the line of credit growth. However, most states require that an amount be shown to account for future interest accrual and possible line of credit growth. HUD instructs lenders to use 150% of the property value/maximum lending limit (whichever is less) on the Note and Deed of Trust/Mortgage.
  
  The face amount on the Deed of Trust differs from what you owe and has nothing to do with when the loan will be assigned to HUD. You only owe what you borrow and the interest that accrues on that amount plus any MIP that accrues, plus any fees accrued but not paid, and finally, any money that the lender may be required to advance on your behalf (i.e., if you do not pay your taxes and the lender is forced to advance this cost). Some borrowers never reach the 98% threshold because they borrow slowly, and the balance remains low. Some borrowers borrow more quickly, the balance rises faster, or their loans are much older, and their loans are assigned to HUD when their balance reaches 98% of the home's original value (or 98% of the maximum lending limit if that was lower). However, the 150% has no bearing on the assignment to HUD.
  Reply to ARLO
Sergio S.
March 19th, 2020

What is the highest growth rate and what would PLF be for a 62-year-old?
Reply to Sergio
- ARLO™
  March 19th, 2020
  
  Hello Sergio,
  
  The growth rate is equal to the interest rate plus the annual mortgage insurance premium (MIP) renewal being charged on the loan. Therefore, your growth rate would be dependent on the margin you received at the origination of your loan and that rate would change annually as the rate changes.
  For example, for ease of illustration, if your initial index rate started at 1% and your margin was 1.5% for an initial rate of 2.5%, you would add the annual MIP of .5% and your growth rate would be 3% in the first year. The growth rate in year 2 would depend on the index during that year to which the margin is added (plus the MIP). The higher the margin, the higher the growth rate on the unused funds but you also have to keep in mind that the higher the margin, the more interest you will accrue once you do start borrowing the funds.
  Also, once you exceed the HUD floor rate of roughly 3% on the expected rate, the higher the rate the less money you receive in your loan. The expected rate is based on a different 10-year index and is higher than the rate at which you accrue interest. HUD uses the 10-year index for the expected rate for only two functions; to determine how much money you will receive on the loan and for illustrative purposes on the initial documents (i.e. amortization schedule).
  
  Borrowers can sometimes benefit from a higher margin, especially when the goal is to experience the highest growth possible for many years before using the line. A higher margin will also give most borrowers a higher monthly payment if they are on the monthly payment plan and that is their goal.
  Bumping up against the maximum principal limit or even getting a slightly lower principal limit (loan amount) for a higher margin and more growth in the line over the long run may be in your best interest, especially when maximum funds in later years are what you seek. This is where it is best to compare the amortization schedules of different options to see which works best for you.
  
  The Principal Limit Factor (PLF) is the amount of money a borrower receives as a percentage of the value of their home. But again, the PLF is dependent on the interest rate. If the interest rate exceeds the floor, the PLF is affected and goes down. Also, if you are closer to 62 and a half, you will receive the benefit for a 63-year-old borrower.
  The best thing to do is to visit a calculator like the one we offer an online calculator to compare the different options available. We do not require your personal information such as your social security number, etc. and it is entirely your choice if you want us to contact you or not -it is not required to receive the information about the loan.
  We do need your date of birth as the calculator requires this to run the correct numbers but even then, if you don't want to give out that exact information, just use the first day of the month you were born and that's close enough! We are here to make it easy for you and then if you have any further questions, we look forward to being of assistance.
  Reply to ARLO
  - Jamie B.
    May 28th, 2020
    
    I have had my reverse mtg. Since I was 62. I am now 71. My current net principal is $403.86... does this mean I have no more money left to receive? Can I redo the loan? My home has been appraised at $495,000.00. I owe current loan balance $290,906,00. Thank you
    Reply to Jamie
    - ARLO™
      June 2nd, 2020
      
      Hello Jaime,
      The only way to know for sure if you qualify under HUD's rules for a refinance is to run the numbers when we have the actual statement and all the information (don't need your social security number or anything like that). We will need to know the information for your current loan and then we can check to see if the recent sales will support a refinance based on HUD rules. Try giving us a call at (800) 565-1722 and ask to speak with a licensed loan officer in your area.
      There is no obligation and if you do qualify under the HUD requirements, we will let you know and then it is up to you to decide if you want to go any further.
      Reply to ARLO
Josephine C
January 9th, 2020

My current loan balance exceeds the original principal limit. What happens to my line of credit in this instance?
Reply to Josephine
- ARLO™
  January 9th, 2020
  
  Hello Josephine,
  You retain access and full use of your line of credit for as long as you have funds remaining and you continue to abide by the terms of your loan. As long as you continue to occupy the property, pay the taxes and insurance in a timely manner and reasonably maintain the home, it doesn't matter what the balance rises to as that is all factored into the original HUD calculations.
  Reply to ARLO
R. Hodnett
November 20th, 2019

How is the loan principle determined?
Reply to R.
- ARLO™
  November 20th, 2019
  
  Good Afternoon,
  
  The Principal Limit (also often referred to as the benefit amount or the loan amount) is determined by a calculation which considers several pieces of information.
  The calculation uses the age of the youngest borrower on the loan, the value of the home or the HUD maximum lending limit, whichever is less, the age of the youngest borrower on the loan and current interest rates.
  The calculator then determines the benefit amount for each applicant (borrower or borrowers) based on the parameters and the benefit availability based on his/her/their ages.
  For example, if the Principal limit for two separate single borrowers is an equal $200,000 based on their circumstances, and their goal in each case is to get the tenure option, or payment for life, there can still be drastically different payments to each.
  Suppose the first borrower is 62 years of age. The $200,000 must last much longer than if the second borrower was 87 years of age, actuarially speaking. Therefore, the monthly payment to the 87-year-old borrower would be much higher each month than to the 62-year-old borrower.
  For the same reason the monthly payment is higher, if the two borrowers with the two different ages had the same valued home, the benefit to the older borrower would be much higher than to the younger borrower. A borrower 25 years older statistically will not live as long and accrue as much interest over the life of the loan as someone 25 years younger. The HUD calculator takes these factors into consideration when determining the benefit amounts.
  
  The calculator will only take so much information into consideration. It does not determine variances for married vs single borrowers, male vs female, healthy vs those with illnesses, smoker's vs non-smokers, etc.
  Rather than try to account for all circumstances, HUD's calculator will only use the one factor of age, and then it uses the age of the youngest borrower on the loan (it does not try to average, etc.).
  Reply to ARLO
Jaime beroth
November 28th, 2018

I have aRML. Since 2011. Can I redo it because my home has gone way up in Value? Then it was 330,000. Now it appraised at 488,00. Can I redo this? Thank you
Reply to Jaime
- ARLO™
  November 29th, 2018
  
  Hello Jaime,
  You can refinance a reverse mortgage if you meet the HUD requirements. The best way to see if the new loan will benefit you is to check our refinance calculator. It will give you real-time costs, rates and the benefits you would expect to receive from a refinance and if you choose to go forward with the loan, will allow you to request additional information or loan application without all the pressure or hassle. Give ARLO a try!
  Reply to ARLO
Felicia A. Lockett
January 2nd, 2018

First, thank you for this article as it has been helpful in my research of a reverse mortgage issue. I do have one question....you stated in this article, "If you live in an area where the third party costs are about $3,000, and your additional mortgage insurance premium runs another $2,000 based on the increase, you would need to net at least $25,000 from the new loan to be eligible." Does this state refer to the year of this article or does it also refer to the 2006 year? If it does not refer to the 2006 as well, do you happen to know what the third party costs and additional mortgage insurance premium ran around in 2006 for the state of Maryland?
Reply to Felicia
- ARLO™
  January 23rd, 2018
  
  Hi Felicia,
  
  You should obtain a quote with today's information as it pertains to your circumstances.
  Reply to ARLO

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