Reverse Mortgage Loan Limits to Change
By Paul Chandler
At long last, the nationwide limit for Home Equity Conversion Mortgages [HECM], HUD’s version of the Reverse Mortgage, is due to change. Once HUD issues their Mortgagee Letter on the subject, which should be around November 1st, the limit in our area will move from $200,160 to $417,000. In other areas of the country, the limit will be even higher. Now this does not mean that all loans will be for that amount, but what it does mean is that seniors whose homes are appraised for more than $200,160 in low cost areas and above $362,000 in higher cost areas will be able to make fuller use of their equity. The appraisal and the age of the youngest homeowner [who must be age 62 or older] will determine the amount available.
The National Reverse Mortgage Lenders Association worked closely with AARP and Congress to ensure that these and other changes were implemented. The origination fee, which previously had been set at 2% of the appraised value with a minimum of $2,000, now has a ceiling of $6,000. The first $200,000 will see no change in the percentage, but higher values will be at a lesser rate. For example, a home valued at $300,000 would have had an origination fee of $6,000 before, but now it would be $5,000.
Prohibition of lenders steering seniors toward investment of the proceeds will now be in place. Many reverse lenders followed this credo before it became mandatory. But, now it is a requirement. When you think about it, it makes no sense to borrow money at around 4% at this point in time to invest in something at 7% for instance. The funds available to seniors have no strings attached and there are a number of reasons that the line of credit may be accessed. The choice is up to the homeowner.
The use of a HECM, the most used version of the Reverse Mortgage, has been limited to refinancing transactions until passage of the housing bill. It will now be allowed for purchases, too. There are positives and negatives when considering a Reverse Mortgage. And ultimately, the seniors must be comfortable with the decision to obtain one before moving forward.
The negatives include the closing costs. These are taken from loan proceeds so a check does not have to be written. Although higher than with other mortgage transactions, a part of the closing costs include the FHA Up Front Mortgage Insurance Premium. This is a two way insurance. It guarantees that the lender will not have a shortfall if the loan amount should exceed the property value. But it also guarantees to the homeowner that HUD will make payments should anything happen to the lender. That along with the origination fee makes up the majority of the closing cost figure.
The positives include a way to supplement income, provide debt relief, take care of certain expenses that are beyond the normal means of the homeowner, and allow the seniors to remain in their homes. The mortgage is just like any other when it comes time to sell the property. It just gets paid off from sale proceeds. No monthly payments are required while the loan is in place.
If you think you may benefit from a HECM Reverse Mortgage, you should speak to someone about them. Discuss with family members if appropriate. And get in touch with a HECM Counselor. This is required before applying for a HECM loan. These loans are not for everybody. But it could be just the right solution for your circumstances.
Paul Chandler, Certified Mortgage Professional, is the Newport Branch Manager for Universal Mortgage Corporation. He graduated from the University of Maine’s business school in 1979 and has been in the financial services industry ever since. Since 1991, he has exclusively been involved in mortgage lending, moving to the Newport area in 1993. He also authors a blog at http://www.misterva.typepad.com. He also has been a contributor to Mortgage Originator Magazine. If you have a mortgage related question, please call 802-334-1999.
