HUD’s New Reverse Mortgage Calculations
The reverse mortgage loan has gone through several changes over the past few years with the most recent changes taking effect this past October 2, 2017. Officially referred to as the Home Equity Conversion Mortgage, or HECM, today’s reverse mortgage is insured by the Federal Housing Administration, a division of the Department of Housing and Urban Development, or HUD. A reverse mortgage is a way for seniors, aged 62 or older, to tap into the equity in their home without having to take out a cash out refinance loan or a home equity line of credit, both of which require monthly payments.
A reverse mortgage however doesn’t have monthly payments. Instead the reverse mortgage loan accrues interest over time and is only paid back when the last occupant leaves the property either by moving to another home or the owner’s passing. Reverse mortgage loan proceeds are issued in one lump sum, as a line of credit or a combination of either. Homeowners must receive counseling as it relates to how the reverse mortgage loan works as part of the approval process. Homeowners must also pass a Financial Assessment. The financial assessment review makes sure there are enough funds available to handle the property taxes due each year, insurance on the property as well as regular maintenance. There is also a residual income test to make sure there are enough funds to cover daily living expenses in addition to current credit obligations and property charges.
Just as with any FHA loan, there are mortgage insurance policies as part of the total loan package. There is an upfront mortgage insurance premium as well as an annual premium. New changes that took effect October 2 increased the upfront premium from 0.5% of available reverse funds to 2.0% of the maximum available funds. On the other hand, the annual premium was reduced from 1.25% to 0.5%.
The amount of money that seniors can borrow using a reverse mortgage loan has also changed. Qualifying loans amounts are based upon the age of the borrower. Older borrowers can receive a larger reverse mortgage compared to someone that is 62 years of age. If there is any existing mortgage(s) on the property they must be paid off through reverse proceeds as there can be no subordinate financing in conjunction with a reverse mortgage loan. Another change addressed the upfront mortgage insurance premium for homeowners who tapped into more than 60% of available equity in the first year. This premium fell from 2.5% to 2.0%.
Maximum reverse loan amounts, referred to as Principal Limit Factors can be different based upon things other than the age of the borrower. If there are two borrowers on the loan, the lender uses the lowest age of the two for qualifying purposes. The property’s value will also establish how much a reverse mortgage can be. And while there is no shortage of reverse mortgage calculators, instead you need to speak with a loan officer experienced in reverse mortgages who will the proper questions and answer the ones you will have.