The Federal Housing Administration (FHA) increased lending limits effective January 1, 2018. As a result, the nationwide lending limit for reverse mortgages increased to $679,650, up from $636,150, an increase of about 7%. While certainly a welcome development, this increase only partially offsets the approximately 15% reduction in benefits that accompanied the new fee structure implemented October 2, 2017. There is a lot of confusion out there about FHA loan limits as they relate to reverse mortgages. Here are some common questions:
Question 1: Don’t FHA lending limits vary from county to county based on home values?
That is true for traditional or “forward” reverse mortgages that people use to buy homes or to refinance, but the FHA has established one nationwide limit for reverse mortgages. It is also true that for traditional mortgages the FHA has higher loan limits for two, three and four unit properties, but the single-family home limit is used for all reverse mortgages regardless of the number of units.
Question 2: So if homeowners owe $679,650 or less they should be able to qualify to get a reverse mortgage as long as they are at least 62 years of age?
That assumption is the source of a lot of confusion among consumers. The FHA uses software to determine reverse mortgage eligibility. That software uses the lending limit (or home value, whichever is less) to calculate the amount the homeowner can borrow. That amount turns out to be 50-70% of the lending limit, depending on the age of the youngest borrower, with younger homeowners receiving less than older homeowners. The logic behind this is that the FHA wants to make sure that with the accumulation of interest over time the amount owed is never less than the value of the home. This protects the FHA insurance fund from losses and also ensures that the homeowner (or heirs) will have something left in net equity when the home is ultimately sold.
For example, if a 62-year-old homeowner has a home worth approximately $679,650, he/she would be eligible to borrow (via a lump sum, loan payoff, monthly payments, etc.) approximately $270,000 after all loan costs are paid. If that homeowner was 92 years of age the eligible amount jumps to $455,000.
Question 3: Is it true that if one spouse is under age 62 the couple cannot get a reverse mortgage unless the younger spouse relinquishes any claim on the home?
That used to be true but is no longer the case. The FHA learned (the hard way!) that when the older spouse predeceased the younger spouse that the survivor was often not in a position to satisfy the reverse mortgage debt and did not wish to leave the home. In these cases, the FHA had a number of unsavory alternatives, including foreclosure or just hanging on and hoping the home had positive equity at the time the survivor vacated the home.
The FHA responded to this by changing the rules to allow a younger spouse, but with these key parameters: First, the loan eligibility is based on the younger spouse, which reduces the amount of money available to the couple. Second, if the couple had available funds in the credit line and/or was receiving monthly payments, these both cease upon the death of the older homeowner. These changes are designed to encourage the surviving spouse to get a new reverse mortgage or to sell the home.