The most frequent question I hear is, “How much can I get with a reverse mortgage?” That’s a challenging question because the answer depends on several factors and it involves strange industry terminology.
The second question I'm asked is, “Why does it have to be so complicated?”
Home Equity Conversion Mortgages (also known as HECMs) are government-regulated and government-insured. This article’s aim is to provide clarity around the first question, “How much money can I get?” and shed some light on the second question, “Why is this so complicated?” I’ll explain why things that seem like strange limitations are in fact good for the reverse mortgage program, borrowers, and their heirs.
The following video also addresses 'How Much' and 'Why So Complicated'. It also speaks to two other questions we're frequently asked:
- My house is worth more than $650,000, why can't I get more money?
- What do you mean I have to wait a year to get some of my money?
Reverse Mortgage Loan Amounts
Factors that affect how much you can get include:
· Value of the home
· Nearest age of youngest borrower or non-borrowing spouse
· Expected interest rate
· Mandatory obligations
· Lender credits
The Maximum Claim Amount (value) is defined as the lesser of:
· The current appraised value
· The FHA National Lending Limit – currently $636,150
· The purchase price – if the HECM is to be used to buy a home
It is not uncommon in Orange County, Los Angeles County, and San Diego California for someone to have a home worth more than the National Lending Limit; i.e., $636,150. When people first start researching reverse mortgages, they think they can borrow 50 or 60% of the home’s value. But it doesn’t work that way.
Consider the median home price in the following areas as reported by Zillow:
· Los Angeles, CA – $622,900
· Carlsbad, CA – $779,600
· Irvine, CA – $786,000· Mission Viejo, CA – 684,700
· San Francisco, CA – $1,167,200
Median means half the homes sold for more than that amount; half sold for less. When an appraisal comes in higher than the FHA National Lending Limit of $636,150, the value above that amount is ignored. The calculation (value) will be based on $636,150. Why? Because the government wants to help average Americans safely access some of the equity in their home.
If someone has a mansion worth $20 million dollars, and at their age they can get 50%, the government does not want to insure a $10 million dollar reverse mortgage. Their take is, “if you have a house worth $20 million and you need $10 million, sell your house.”
And lately I’ve been getting the question, “What about a jumbo reverse mortgage; I hear those have come back?” They have but unless the home is worth in excess of a $1.2 million, and the client is over 70, the client usually gets more money with an FHA-insured HECM, even with the haircut in value down to the $636,150 limit.
To learn about the differences between the FHA reverse and the new Jumbo Reverse mortgages, click here.
The next factor is the age. Because of recent changes, the youngest borrower age has been re-defined to include the borrower’s spouse, even when they’re not on the loan. Why does a young senior (age 62), not get as much money as someone who is 82? People who lend money want their money back (return of principal) with interest (for the risk they took).
With a reverse mortgage, no house payment gets made each month. The principal and interest are paid back at the end of the loan. Each month, the unpaid interest is added to the balance – much like a student loan in deferment until the child graduates. The older the person, they less time they’re likely to be in the house, the less interest accumulates; meaning the lender can make a bigger loan.
Why Reverse Mortgages Got Bad Press
This is a good place to take a detour and talk about two reasons why, in years gone by, reverse mortgage lenders got some bad press and lawsuits. The first issue was tied to spouses removing themselves from the deed (coming off title) so the remaining spouse could qualify for a reverse mortgage, or get more money.
When the borrowing spouse passed away, the spouse not on title had to move and sometimes had nowhere to go. The second issue occurred when seniors took as large a loan as possible and spent the money too quickly. As time went by, they did not have enough money to pay their property taxes, insurance, and maintenance so they were technically in default.
Sadly, some unscrupulous loan officers encouraged seniors to take out a fixed-rate reverse mortgage and borrow as much as possible to maximize their own commissions. The other problem was seniors didn’t understand that ‘not making a house payment’ didn’t mean that they didn’t still have to keep the house up and pay taxes.
The government addressed these problems with recent program changes. First, non-borrowing spouses are now allowed to stay in the home, even after the borrower leaves (under certain conditions). And second, they implemented the 60% rule, which at a high level says the senior can only withdraw 60% of their allowable limit in the first year. This is to protect them from burning through the money (or letting the kids burn through the money). After that first year, the remaining portion is available – up to their Principal Limit.*
There are other exceptions and limitations that you’ll want to have explained. Just be aware that if based on the age of the youngest borrower you qualify for 50%, then in the first year, you can only get 60% of the 50%. A notable exception is that one can access more than 60% to pay off an existing mortgage.
In fact, you can get that much plus an additional 10%. When a reverse mortgage is used for a purchase loan, the borrower can get 100% of the Maximum Claim Amount (value).
Borrowers Get More When Rates Are Low
Why can borrowers get more when rates are low? The reason is because that unpaid interest builds up more slowly. The lender’s goal is to loan as much money as possible, but not too much because when the house is sold they want to get paid back.
The HECM program uses life expectancy tables to estimate how long the borrower is likely to live. Based on that, they can calculate the correct percentage. For example, if the expected interest rate is 5% or less, a 62-year-old can borrow 52% and a 90-year-old can get 75%. At 6%, the range is 40-65%. And at 7%, the range is 31-58%. Some borrowers figure they'll wait until they're older so they can get a larger percentage. However, if rates rise while they're waiting, they'll end up getting much less. Prevailing interest rates move the needle more than the borrower's age.
Finally, a few other important items that affect net proceeds; things you should discuss with your reverse mortgage specialist include:
· Mandatory obligations
· Set-Asides for mandatory repairs
· Set-Asides for taxes and insurance
1) It is important to work with someone who understands the nuances of the reverse mortgage program and who can explain it in plain English
2) Maximize the net proceeds by utilizing fee credits
3) Be grateful for and take advantage of today’s low interest rates – when rates rise, people will get less
For a free, no obligation consultation about how much you can get, and how you can get more by having the lender pay some of your fees, click the Complimentary Consultation button below.
FHA Mortgagee Letter 2013-27
Expected Rate*is equal to the 10-year benchmark corresponding to the base index, as designated by FHA, plus the net margin
Principal Limit* is the allowable LTV ratio times the Maximum Claim Amount
About the Author
Kent Kopen earned the Reverse Mortgage Specialist designation, March 2007, by completing training in Orlando, FL. He then earned the prestigious CRMP (Certified Reverse Mortgage Professional) designation in 2016. There are less than 150 CRMP designees in the U.S. Kent provides tools and strategies to professionals who offer financial advice in a fiduciary capacity. "Our resources are designed to help financial advisors, CPAs, estate planning attorneys and insurance professionals help seniors optimize their home equity to provide greater security and peace of mind."