If you're house-rich but cash-poor, and aged 62 or older, the FHA's Home Equity Conversion Mortgage, or HECM (pronounced "heck 'em) might be the best solution to your problem. This FHA reverse mortgage allows you to receive loan proceeds as a lump sum, line of credit or monthly cash installment. And you make no mortgage payments as long as you remain in your home.
And there's good news for homeowners considering a reverse mortgage today: you may be able to borrow more.
What Is Today's HECM Reverse Mortgage Limit?
Late last year, the FHA announced that loan limits for the HECM were going up. It is now $1,149,825 across the country, up from $1,089,300. That means the maximum claim amount (MCA) has increased by another $60,525. The MCA is the lesser of:
- your home's appraised value; or
- the maximum HECM loan limit
The term "claim" refers to the amount the FHA's insurance fund would have to pay if the loan went into default.
That's welcome news, says Dan Hultquist, vice president of Organizational Development for Finance of America Reverse.
Related: See Today's HECM Rates and Trends
Good News for Owners of Expensive Homes
"This higher limit makes the HECM product available and more attractive to more borrowers. That's especially true in states with higher property values like California, Hawaii, and New York," he says.
The recent lending limit increase represents the fourth consecutive year in a row that the government has increased the lending limit. The HECM limit is 150% of the Federal Housing Finance Agency's conforming loan limits for Freddie Mac and Fannie Mae; recently, these increased to $766,550 for most of the country. The higher HECM limit applies to case numbers assigned on or after January 1, 2023, through Dec. 31, 2024.
Raising the conforming loan limit an extra $40,350 can make a difference.
"This is beneficial to many homeowners in regions with higher-priced homes. It's also beneficial to HUD and residential lenders, as loan volumes should increase in those areas."
Hultquist says that by law, HUD does not have to increase HECM loan limits
"But they will often tie this value to 150% of the conforming lending limits. Plus, adding more higher-value homes to the eligible pool contributes more money into FHA's insurance fund."
Hultquist says these higher-value homes tend to be a lower risk to the FHA.
"That's because they often appreciate at faster rates. And they're less likely to be 'upside down' when the home sells."
Related: Home Equity Loan or Reverse Mortgage? Which Is Right for You?
New Increase Offsets Earlier HECM PLF Reductions
Lyn Coffin is a Certified Reverse Mortgage Professional with Mortgage Network. She says the higher HECM lending limit expands the options available to those seeking a reverse mortgage.
"This is always a welcomed rise, as it helps fill the gap between the HECM product and jumbo reverse mortgages - also known as non-government proprietary reverse mortgage products," she says. "It offsets the latest imposed reductions in the principal limit factor (PLF) -- the share of the maximum claim amount you can borrow."
Vivian Dye is a reverse mortgage specialist with GuardHill Financial Corp. She concurs that raising the HECM lending limit helps owners with higher-value homes by countering the effect of the PLF reduction.
"Say you owned a home worth $1,100,000 previously," Dye says. "For HECM borrowing purposes, its value was previously capped at the HECM lending limit of $1,089,300. Based on the age of the youngest borrower, you might have seen 50% of that value or an estimated $544,650. But with the new higher lending limit, that same borrower would today have access to an estimated $574,912."
In other words, "it allows a greater amount of your home's value to count in that calculation," says Dye. "The government increased the maximum claim amount by $60,525, perhaps because so much has been done over the past few years to manage risk."
Higher HECM Limits Mean More Choice for Homeowners
Upping the MCA has another benefit: Borrowers can soon tap more equity from their properties using a HECM.
Dye agrees with Coffin that the lending limit increase results in providing more choices to reverse mortgage candidates. When HECMs compete with so-called proprietary or jumbo reverse mortgages, borrowers win.
"There is now more competition with proprietary reverse mortgage products, particularly for higher-value homeowners and generally at a lower closing cost than before," Dye adds. "The more alternatives borrowers have, the better chance they will find a product that suits their needs."
Raising the HECM lending limit also benefits lenders who don't offer a proprietary reverse mortgage loan product, she notes.
Related: What Is a Proprietary Reverse Mortgage?
HECM vs. Jumbo Reverse Mortgage
Historically, 90% of all reverse mortgages were HECMs. But today, jumbo reverse mortgages comprise 25% of all reverse mortgages by volume. There are reasons for this.
- Proprietary reverse mortgage lenders may allow higher loan amounts (in that case, proprietary reverse mortgages are "jumbo" reverse mortgages).
- These loans don't require FHA mortgage insurance.
- Closing costs may be lower
- The percentage of your home's value available to borrow against may be higher
However, the government does not manage or back jumbo reverse mortgages. Jumbo reverse mortgages don't have the fee limits and other consumer protections that come with the government-backed product. And most are fixed-rate products - borrowers must take the entire proceeds as a lump sum. You may not have the option of credit lines or monthly payments. That may not always be in your best interest as a borrower.
"With a HECM product, you can choose a fixed rate or variable rate," says Dye.
However, you have to pay a mortgage insurance premium with a HECM. The initial MIP is 2%. Over the life of the loan, you also pay an annual MIP of 0.5% of the outstanding mortgage balance.
"Two percent of $1,149,825 - the new HECM lending limit - is a hefty amount of money added to the rest of your closing costs," Dye says.
"Until recently, this hit at closing was countered by a two-tier system in which the MIP was calculated based on the amount of money needed at closing; that seemed to be a much more equitable and understandable way of handling those costs. But now, after this change, regardless of the amount one borrows initially during the first year, the borrower will be charged the full 2% MIP across the board."
See HSH's Comprehensive Guide to Home Equity Conversion Mortgages
