The amount of money available to you under a FHA-insured HECM loan is called the Principal Limit. The Principal Limit is generally determined by your home’s appraised value, the age of the youngest of the Borrower or his or her spouse if the spouse is not a Borrower, subject to an overall program limit of $636,150. The lesser of your home’s appraised value, the sales price of the home (for purchase money HECM loans), or the HECM program loan limit of $625,500 is called the Maximum Claim Amount. The Principal Limit is calculated by multiplying the Maximum Claim Amount by a Principal Limit Factor. The Principal Limit Factor is based on information published by HUD and varies based upon certain factors including the age of the person and the interest rate of the loan.
The amount of your Principal Limit that you can access at the closing of your loan and/or during the first 12 months of your loan is further limited. Note that FHA recently release Mortgagee Letters that revised the HECM program to protect Non-Borrowing Spouses, as described below, and to limit fixed rate HECM loans to a Single Disbursement Lump Sum payment option.
This article explains those limits and important elections and certifications you and your spouse, if you are married, will have to make and inform the Lender about, prior to the closing of your HECM loan.
The amount of your Principal Limit that you can access at the closing of your loan and/or during the first 12 months of your loan is further limited to the Initial Disbursement Limit. For adjustable-rate HECM loans, after the first 12 months of your loan, you can obtain the remainder of your available Principal Limit.
The Initial Disbursement Limit is equal to the greater of sixty percent (60%) of your Principal Limit, or the sum of your Mandatory Obligations plus ten percent (10%) of your Principal Limit. Mandatory Obligations include items such as paying off your current mortgage loan secured by your home, and closing costs and mortgage insurance due with your new HECM loan. Disbursements cannot exceed the Principal Limit established at closing.
If your Mandatory Obligations are greater than fifty percent (50%) of your Principal Limit, you may elect to take up to an additional ten percent (10%) of your Principal Limit at closing and/or during the first 12 months of your HECM loan. If your Mandatory Obligations are greater than fifth percent (50%) of your Principal Limit , you must decide, prior to loan closing, whether and what what amount of this additional ten percent (10%) of the Principal Limit, if any, you want to receive, and if so, under which type of payment plan. If your Mandatory Obligations are greater than sixty percent (60%) of your Principal Limit, you must decide under which type of payment plan you wish to receive this additional ten percent (10%) of the Principal Limit. You must make this election and inform the Lender prior to the closing of your HECM loan.
Note that under certain circumstances, electing to receive or have access to additional Principal Limit may increase the cost of your HECM loan, as explained below. If the amount you have access to and elect to receive at the closing or during the first 12 months of your HECM loan exceeds sixty percent (60%) of your Principal Limit, your initial mortgage insurance premium (“MIP”) will be two and one=half percent (2.50%) of your Maximum Claim Amount. For example, this could occur if your Mandatory Obligations exceed fifty percent (50%) of your Principal Limit and you elect to take all of the additional ten percent (10%) of your Principal Limit at closing and/or during the first 12 months of your HECM loan. This also could occur if your Mandatory Obligations exceed sixty percent (60%) of your Principal Limit (regardless of your election as to the additional 10%). However, if the amount you have access to and elect to receive at the closing or during the first 12 months of your HECM loan is equal to or less than sixty percent (60%) of your Principal Limit, the cost of your HECM loan will be lower because your initial MIP will be one-half of one percent (.50%) of your Maximum Claim Amount.
Subject to the Initial Disbursement Limit described above, you may receive your HECM loan proceeds as monthly payments, a line of credit or a combination of both. As part of the changes made by recently released FHA Mortgagee Letters, all fixed rate HECM loans are limited to the Single Disbursement Lump Sum payment option. Under a Single Disbursement Lump Sum payment option, loan advances to the borrower are limited to a full draw to be made at the consummation of the loan, and do not provide for future draws by the borrower. The Single Disbursement Lump Sum Payment Option also cannot exceed the Initial Disbursement Limit described above. However, if you elect a Single Disbursement Lump Sum Payment Option, except for repair or property charge set asides, you will receive the available loan proceeds only at the consummation (or closing) of your loan, and you will not be able to receive any further disbursements under the loan (notwithstanding any disbursements you may receive from the repair set aside to reimburse you for the actual cost of materials you ordered and paid for required repairs), nor elect payment plan changes after closing.
