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How much money do you get from a reverse mortgage?

What percentage of the home's equity can you get on a reverse mortgage?

Senior couple considering a reverse mortgageA reverse mortgage is a federally backed mortgage by the Federal Housing Administration (FHA). The FHA is a subsidiary of the Department of Housing and Urban Development (HUD).

A reverse mortgage, is also known as a home equity conversion mortgage (HECM). The reverse mortgage allows homeowners who are 62 or older to borrow against the equity in their home. The reverse mortgage was signed into law on February 5, 1988, by President Ronald Reagan as part of the Housing and Community Development Act of 1987.

Without a doubt, the most asked question about reverse mortgages is the amount of money that a reverse mortgage can provide, and rightfully so. Estimating the proceeds from a reverse loan requires a few calculations.

Step #1 - Maximum Claim Amount

The total mortgage amount is first limited by the value of the house (or condominium) and the maximum loan limit. Each year the FHA sets the maximum loan amount for an FHA reverse mortgage. For 2019, the maximum reverse loan limit is $726,525. The maximum loan amount is the lesser of the appraised home value or the maximum loan amount.


Step #2 - Principal Limit (PL) Factor

The FHA uses charts to determine the maximum loan amount based on the "expected interest rate"* and age of the youngest spouse or partner . . . even if the spouse or partner will not be on the loan application. The reason is that the reverse mortgage program allows the spouse or partner to remain in the home if the applicant passes away.

The following example illustrates the amount of money a 66 year old applicant could receive at an interest rate of 5%. The amount of money increases with age. At 76, the principal limit factor is .486, which means the Gross Principal Limit of $48,600.

1. Appraised Value $100,000
2. Maximum FHA loan limit $726,525
Maximum Claim Amount $100,000 = lesser of 1. or 2.
X Principal Limit (PL) Factor (see below) 0.424
= Gross Principal Limit $42,400

Step #3 - Maximum loan amount in the first year

Unfortunately, the program limits the distribution of the "net" proceeds to 60% of the the principal limit in the first year. However, if the amount you owe on an existing mortgage (or other required payments) is more than 60 percent of your principal limit, you can take out enough to pay off your mortgage (and any other required payments, including upfront loan fees) plus additional cash of up to 10 percent of your principal limit.

= Gross Principal Limit $42,400
Maximum withdrawal 1st year X 60%
First year limit $25,440

Step #4 - Mortgage pay offs and closing costs

The Gross Principal Limit establishes the maximum loan amount BEFORE deductions. Reductions from the Gross Principal Limit include existing mortgages, home equity loans or liens . . . and closing costs The reverse mortgage program requires the pay off existing mortgages, home equity loans or liens.

There are closing costs with a reverse mortgage, just like a traditional mortgage. Common closing costs include:

Appraisal Fee $455.00
Closing Protection Letter $125.00
Counseling Fee  
Credit Report $21.00
Doc Prep Fee $595.00
Document Delivery $45.00
Document Preparation $140.00
E-Recording fee $45.00
Flood Certificate $9.00
HECM Document Services $320.00
Lenders Title Insurance and Endorsements $900.00
Loan Origination Fee $2,500.00
Mortgage Insurance Premium $2,000.00
Recording Fee -Mortgage $334.00
Release Fee $45.00
Repair Administration $50.00
Tax Certificate Fee $60.00
Title endorsements $150.00
TOTAL CLOSING COSTS $7,794.00

There are two large fees with a reverse mortgage, the Mortgage Insurance Premium is a fee that is paid to the FHA to support the reverse mortgage program. The cost is 2% of the Maximum Claim Amount (see above).

The second large cost is the Loan Origination Fee. This fee is paid to the lender. The reverse mortgage program permits the lender to charge the greater of $2,500 or 2% of the first $200,000 of the home's value plus 1% of the amount over $200,000. HECM origination fees are capped at $6,000. Some lenders waive or reduce the origination fees on certain products.

Final Step - Reverse mortgage calculation

1. Appraised Value $100,000
2. Maximum FHA loan limit (2019) $726,525
Maximum Claim Amount $100,000 = lesser of 1. or 2.
X Principal Limit (PL) Factor* 0.424
= Gross Principal Limit $42,400
Maximum withdrawal 1st year X 60%
First year limit $25,440
Less closing costs $7,794
Less any mortgages or liens ?
TOTAL FIRST YEAR AVAIABILITY $17,646

* Principal Limit (PL) Factor - The FHA uses a hypothetical interest rate (expected interest rate) to determine the principal borrowing limit (i.e. maximum loan amount before expenses and pay offs). The expected interest rate is the sum of the 10-year LIBOR Swap Rate and the Lender's Margin. The intersection of the expected interest rate and age of the youngest borrower, or non-occupying borrower is the principal limit factor/percentage.

RELATED READING:

HECM program pros and cons - There are PRO's and CON's to the HECM loan program. Read more

How much money do you get from a reverse mortgage? - The total mortgage amount is first limited by the value of the house (or condominium) and the maximum loan limit. Read more

Reverse mortgage with bad credit - The Mortgagee (Lender) may consider the Borrower to have satisfactory credit if: the Borrower has made all housing and installment debt payments on-time for the previous 12 months and no more than two 30-day late mortgage or installment payments in the previous 24 months; and the Borrower has no major derogatory credit on revolving accounts in the previous 12 months. Read more

Reverse Mortgage Counseling and Education - Did you know that borrowers required to complete a counseling session prior to making mortgage application? Read more

Reverse mortgage financial assessment - Lenders are required to determine if you can meet your monthly payment obligations. Read more

Reverse mortgage to purchase a home - Did you know that you can purchase a home with a reverse mortgage? Read more

Reverse mortgage payment options - There are six different ways you can receive the proceeds from a reverse mortgage. Read more

Can you sell a house with a reverse mortgage? - The dilemma of selling a home occurs when the sales price is less than the loan balance. Read more

What is an HECM loan? - A HECM is a reverse mortgage. Read more