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Maximum claim amount for 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 2021, the maximum reverse loan limit is $822,375. 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 $822,375

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 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

With a reverse mortgage, there are two significant costs. The Mortgage Insurance Premium is a charge paid to the FHA to maintain the reverse mortgage program.

The fee is 2% of the Maximum Claim Amount (see above).

The Loan Origination Fee is the second major expense. The lender receives this charge.

The reverse mortgage scheme allows 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.

The origination cost for a HECM is limited to $6,000. On some items, some lenders waive or decrease the origination fees.

Final Step - Reverse mortgage calculation

1. Appraised Value $100,000
2. Maximum FHA loan limit (2021) $822,375
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.

Rotating question markFrequently Asked Questions About Reverse Mortgages

Q. Are HECM loans a good idea?
A.The reverse mortgage (HECM) is a good loan, but it's not for everyone. The acquisition costs are a bit high and borrowers should definitely shop lenders for the lowest interest rate and fees. The HECM loan is ideal for homeowners who just don't have enough money to pay the real estate taxes and homeowner's insurance. The HECM for purchase is an appealing use for the HECM loan.

Q. Can I sell a house with a reverse mortgage?
A. The HECM loan is paid off under the sale, just like any other loan. And the HECM loan is a no-recourse loan. That means that if the loan balance exceeds the sales price, the shortage will be forgiven by the lender.

Q. Can you qualify for Medicaid with a reverse mortgage?
A. "Medicaid eligibility can be affected by a reverse mortgage. As a means tested benefit, Medicaid, like Supplemental Security Income (SSI), requires recipients to have no more than $2,000 in countable assets one day out of the month. " SOURCE: Law Offices of Nay & Friedenberg LLC

Q. Does a reverse mortgage pay property taxes?
A. The real estate taxes are not included in a reverse mortgage. The borrower/homeowner(s) is responsible to pay these costs.

Q. How do heirs pay off a reverse mortgage?
A. As stated in the previous question, if the loan balance is greater than the home value, the heirs are not required to pay the difference. If the heirs sell the home, the lender will take the proceeds from the sale as a payment on the loan, and HUD/FHA will cover any remaining loan balance.

Rotating question markReverse Mortgage Frequently Asked Questions

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

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

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

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

Reverse mortgage payment options - There are six different ways you can receive the proceeds from a reverse mortgage. 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 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 preceding 12 months and has not had more than two 30-day late mortgage or installment payments in the preceding 24 months; and the borrower has not had any significant derogatory credit on revolving accounts in the preceding 12 months.  Read more