For the third year in a row, FHA has increased the maximum lending limits for the Home Equity Conversion Mortgage program (HECM). Via Mortgagee Letter 2018-12, HUD announced the new loan limit of $726,525, which will take effect 1/1/19.
So what exactly is a “maximum lending limit” and who benefits the most from an increase?
GREAT question! I’m going to give you the “Big Bird” version of what this all means.
As you’ve read in my prior posts (because you’re constantly on my web page reading my blog), FHA has a formula to determine the amount of proceeds a reverse mortgage borrower can access. The 3 components of the formula are the age of the youngest borrower, the current interest rate AND the appraised value (or the maximum lending limit; whichever is LESS).
I know…that last part about the appraised value sounds like a mouthful.
Let me explain.
The age and the interest rate determine the Loan to Value, or LTV, a borrower qualifies for. This is simply the percentage of the value a borrower can access with the reverse mortgage. For values of $726,525 or lower, the borrower gets the LTV of the full property value.
For instance – With an appraised value of $400,000 and an LTV of 50% (based on the borrowers age and interest rate), this borrower would have access to $200,000 in reverse mortgage proceeds.
For values OVER $726,525, the borrower only gets a percentage of the appraised value up to $726,525.
For instance – With an appraised value of let’s say $1,000,000 and an LTV of 50%, this borrower would only get 50% of $726,525 (approximately $363,262.50). It’s a percentage of the appraised value or the maximum lending limit, whichever is LESS.
Does that make sense??
With all of this being said (and I definitely said a lot), the new increased lending limits are going to have the biggest impact on borrowers with home values of $679,000 and above.
The new limits will also benefit HECM for Purchase borrowers that are looking to purchase a new home with a higher purchase price. These borrowers will see a reduced down payment requirement.
What to learn more about buying a new home with the HECM for Purchase? Click here.