Michael G. Branson Edited by 
Cliff Auerswald 16 commentsBy Michael G. Branson Edited by Cliff Auerswald 16 comments
I am 87 and received a HECM Loan. The maximum claim is $250,000. Due to age and other factors, the credit limit was due to reach the maximum claim. Withdrawals were denied when the balance was around $225,000, and no withdrawals have been allowed since the servicer has been getting compound interest each month. HUD has been accessing fees and premiums. Maybe I’m delusional, but something doesn’t add up here. Am I wrong?
The Maximum Claim is used to determine your reverse mortgage benefits or loan proceeds, which is known as the Principal Limit. The Maximum Claim Amount is determined by the lower of one of three things: the appraised value of the property, the purchase price on a purchase transaction, or the HUD lending limit in effect at the time.
Once the Maximum Claim Amount is determined, the HECM calculator then considers other factors, age(s) of the borrower(s), value, and current interest rates at the time to determine the Principal Limit or proceeds available for the borrower(s) under the reverse mortgage program.
Borrowers need to remember, though, that the Maximum Claim Amount that they see at the start of their loan is defined by the CFPB as:
The lesser of the appraised value of the home, the sale price of the home being purchased, or the maximum limit HUD will insure. The maximum claim amount is one factor used to calculate how much a homeowner can borrow with a reverse mortgage loan. -CFPB
The Maximum Claim Amount is just one of the factors used in the calculation to determine how much money the borrower will receive in the Principal Limit or loan amount. It is not a maximum benefit to be paid out to the borrower with the loan.
The Maximum Claim Amount will usually be the appraised value of the property but, at times, can be less if the transaction is a sale when the home is sold at a price that is less than the appraised value or when a property is valued higher than HUD’s stated Maximum Claim Amount for the program.
For example, in 2024, HUD’s stated program Maximum Claim Amount is much higher than when you received your loan due to housing prices increasing significantly since then. In 2024, the Maximum Claim Amount will be $1,149,825.
When a borrower’s home is valued above the Maximum Claim Amount, it doesn’t mean they cannot get a reverse mortgage. It means they will not receive further proceeds when the home is valued above that limit.
A borrower with a home valued at $1,300,000 with all the same factors (age, rates, etc.) would receive the same amount of money as a borrower with a property valued at $1,149,825 due to the Maximum Claim Amount, but depending on how they draw their funds and how they allow their lines of credit to grow, either one could far outlast the other based on their borrowing patterns.
| Age of Borrower | Principal Limit Factor | Current Lending Limit |
|---|---|---|
| 62 | 38.2% | $1,149,825 |
| 65 | 40.3% | $1,149,825 |
| 70 | 43.9% | $1,149,825 |
| 75 | 46.7% | $1,149,825 |
| 80 | 51.0% | $1,149,825 |
| 85 | 57.0% | $1,149,825 |
| 90 | 63.6% | $1,149,825 |
*Principal Limit Factors taken from HUD.gov using an example expected rate of 5.50%. To arrive at your NET principal limit, you must deduct reverse mortgage costs, including upfront insurance (approx. 3%). PLF tables source: https://www.hud.gov/sites/documents/august2017plftables.xls
You have the line of credit program (if you had the fixed rate program, you would have been required to take a full draw at the start of the loan, and there would not have been any additional funds available for subsequent payments).
It has a growth feature that allows the funds remaining in the line to grow at the same percentage as your interest plus your Mortgage Insurance Premium (MIP) combined.
So, for example, if the interest on your loan was 2.5% and your MIP is .5%, the unused funds in your line of credit would grow in availability at 3%. Each year, that rate changes as your interest accrual rate changes.
Therefore, your Principal Limit, or the loan proceeds available to you, will fluctuate based on the draws you take (your Principal Limit is reduced by the amount of draws you take from your line) and the growth of your credit line (your line increases by the amount of the growth on the line based on the unused portion).
Borrowers receive initial disclosures with amortization schedules that give examples of the relationship between the Maximum Claim Amount and the Principal Limit, but unfortunately, they are only estimates and cannot possibly accurately foretell future interest rates or borrower borrowing habits.
They are only examples and can vary significantly once borrowers begin taking draws and interest rates change. This is why borrowers need to pay attention to the monthly statements they receive from their servicer.
The statement breaks down everything happening on the loan every month. We have an article online to help people read and understand their statements at: https://reverse.mortgage/understanding-statement.
If this general explanation doesn’t answer all your questions or if your servicer’s statement is different and doesn’t look the same, don’t hesitate to contact them and make them explain it to you.
If you need further assistance, there are attorneys and counseling companies that advertise low-cost assistance who can advocate for you so that you don’t wait until after you are out of funds to find out there was a misunderstanding of the Maximum Claim Amount and Principal Limit.
Also, if you received your loan that long ago, you might benefit from a refinance now under new values and new Maximum Claim Amounts, and that’s worth looking into.
The principal limit is essentially the loan amount on a reverse mortgage. It is the total amount of money available to borrowers based on their specific loan parameters.
HUD determines the principal limit factors if it is a Home Equity Conversion Mortgage (HECM). The lender only sets the principal limit factor if it is a Non-HUD insured Proprietary reverse mortgage.
3 pieces of information determine the principal limit factor. For a Home Equity Conversion Mortgage (HECM), those are the Home Value (or Max Claim), whichever is less, the expected interest rate, and the age of the youngest borrower or spouse. The higher the value and the older you are, the higher the percentage of the principal limit factor will be. However, the higher the expected rate, the lower the principal limit factor. For proprietary products, the same 3 items factor into the calculation. The only difference is the higher the interest rate, the higher the principal limit factor on proprietary products.
The percentage of equity you can get from a reverse mortgage will depend on the age of the youngest borrower or spouse, interest rates, and product type. The older you are, the higher the percentage for all product types. On the Home Equity Conversion Mortgage (HECM) program, the percentage ranges from 38% (Age 62) to as high as 72% (Age 96+) at current interest rate levels as of December 2022 but can go lower if there is a spouse who is younger than 62. However, when rates reach the floor for the HUD calculator, which they did as recently as 2021 and could do again in the future, the percentage ranges from 52% (Age 62) to as high as 75% (Age 92+). On Proprietary products, the percentage ranges from as low as around 29% (age 55) to as high as 51% (Age 87+).
The reverse mortgage maximum claim is the cap on the value that can be used to calculate your principal limit. As of January 2024, the maximum Home Equity Conversion Mortgage (HECM) claim is $1,149,825. If you have a home value of $1,200,000, the principal limit will be determined using a value of $1,149,825. For proprietary products, the maximum claim is simply the home value, as the HECM limit does not cap them, and therefore, these products are popular for those with home values above the government limit.
ARLO recommends these helpful resources:
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16 Comments on this Article| Pat July 31st, 2024 |
 | Michael Branson July 31st, 2024 |
There really is nothing to "renegotiate." The interest is a product of the index plus the margin, so when rates rise for the index, the interest that accrues rises. Part of the problem is that interest rates have risen a lot lately. If you have a lender that gave you a 2.75% or 3.00% margin (or in some cases even higher) when you closed your loan, your interest now is accruing at a much higher rate than a loan that came with a 1.5% or lower margin. I also don't know if your loan was closed at a time when mortgage insurance renewals accrued at 0.50% or 1.25%. If you are at the higher accrual, the only way to change that would be to refinance the loan (more about that in a moment).
Available margins are a function of the value of the loans, the profit margin the lender sets for itself, and what it costs lenders to originate those loans. The value is pretty much universal, but not all lenders have the same costs to originate or have decided to originate loans making the same amount of money on a per-loan basis. I always advise borrowers to compare several proposals from different lenders because something like a higher margin can cost you much more in the long run than, say, a slightly higher appraisal fee. I've seen people pay as much as a 1.75% higher margin to save $100 on their appraisal fee. That higher interest rate will cost them tens of thousands of dollars over the life of the loan in many cases.
While you cannot renegotiate your current loan, you can repay the loan at any time without penalty. You can also choose to make payments at any time, even though none are required. I don't know your age, so it's probably not an option without having to bring cash in based on today's rates, but you can refinance the loan if it makes sense to do so when the rates decline. At that time, you would want to be sure to get the lowest margin possible so that the interest on the new loan accrues as slowly as possible. Rates have not come down enough yet to make it feasible for most borrowers to refinance, but the word coming out is that we may see the first rate reduction in September. One reduction alone won't be enough to bring the rates down to help most borrowers, but it's a start, so you should definitely watch the interest rate announcements.
| Steve June 28th, 2024 |
| Michael Branson June 29th, 2024 |
If you draw money and pay it down, it not only makes the funds available again, but the unused portion of the line of credit will grow in availability. But that's assuming you do not pay the line down to a zero (-0-) balance. If you ever pay the entire outstanding amount and the balance owed is down to zero, the loan is paid in full and would be closed. You cannot keep the loan open with a zero balance.
If you plan to pay the loan down soon after you open the loan and want to keep the loan open, you need to be sure to keep a small balance outstanding and not repay the entire amount. The interest that would accrue on a balance of under $10,000 is pretty nominal and ensures your loan is available to you in the future if that is your goal.
| Jim B. April 2nd, 2024 |
Is a reverse mortgage possible for a 79 year old applicant on a home valued at $450,000 with a current mortgage of $280,000?
| Michael Branson April 17th, 2024 |
The factors that determine how much money a borrower receives with a reverse mortgage are the age of the youngest borrower on the loan (or eligible non-borrowing spouse), property value, and interest rates at the time. In today's rate environment, you would be short to close by a little over $77,000.
Contrast this to a few years back when interest rates were below the HUD floor, and you still would have been short to close. At the HUD floor of 3%, you would be less than $4,000 short to close and would be able to bring that money in to close if you still wanted to do the loan.
My point is that interest rates make a huge difference to reverse mortgage borrowers, as does your property value. Whereas it may not work for you today, a few rate cuts and some appreciation of your property may make it feasible more quickly than you might think. I would suggest that you consider going to our calculator at https://reverse.mortgage/calculator, and if you would like to have us contact you when rates decline, you can leave your email address, but that's entirely up to you.
| John October 23rd, 2023 |
Mr. Auerswald, I am still a little confused about MCA. We all know that once 98% of MCA reached, investor can assign the mortgage back to HUD. However, what is MCA really mean here? I know on mortgage document, the maximum principal amount usually 1.5 times of appraisal value. Is this maximum principal amount MCA? Would you mind clarify for me? Thanks, John
| Michael Branson October 26th, 2023 |
98% of the Maximum Claim Amount referred to is the maximum amount that HUD will insure on the loan before the lender must assign the servicing and the loan to HUD. That Maximum Claim Amount is the cap on the value that HUD will allow the lender to use to determine the loan amount for borrowers on a reverse mortgage. So when the outstanding balance of a reverse mortgage approaches 98% of the original Maximum Claim Amount, the loan is assigned back to HUD. For example, HUD uses the property value or the maximum claim amount to determine the amount of money the borrower will receive based on the calculator for their circumstances. The loan amount available is known as the Principal Limit and is only a percentage of the Maximum Claim Amount that rises as borrowers age. That maximum claim amount now stands at $1,089,300. This means that if your home is worth up to $1,089,300, the maximum claim amount is the value of your home at the time the property is appraised, but if your home were worth more than $1,089,300 (i.e., $1.200,000), the HUD cap on that maximum claim amount would be $1,089,300 and that would be the amount that would be used in conjunction with the borrowers age(s) and interest rates to determine how much money the borrower(s) would receive with their reverse mortgage.
For argument's sake, let's say the borrower receives $400,000 on a $1,000,000 property due to their age in today's market. The Maximum Claim Amount is $1,000,000; the Principal Limit is $400,000, and the loan documents will show a face amount of $1,500,000. The 98% rule is a rule that HUD has for lenders that says that the lender must assign the servicing to HUD if the loan to value reaches 98% of the original loan to value to protect their ability to receive claim payment. This is strictly between HUD and the lender, and lenders routinely make the assignment to HUD to avoid risking their insurance against the risk of loss. This loan must be assigned to HUD only when the outstanding balance reaches $980,000.
The 1.5 times the value or 150% that you see on your loan documents is what HUD requires for states that require an amount to show on the loan documents. HUD would prefer that there is no mortgage amount on the loan documents because they do not know in advance what your balance may be in the future. After all, the balance can rise with interest accrual, and you have access to more money over time with the line of credit growth. However, most states require that an amount be shown to account for future interest accrual and possible line of credit growth. HUD instructs lenders to use 150% of the property value/maximum lending limit (whichever is less) on the Note and Deed of Trust/Mortgage.
The face amount on the Deed of Trust differs from what you owe and has nothing to do with when the loan will be assigned to HUD. You only owe what you borrow and the interest that accrues on that amount plus any MIP that accrues, plus any fees accrued but not paid, and finally, any money that the lender may be required to advance on your behalf (i.e., if you do not pay your taxes and the lender is forced to advance this cost). Some borrowers never reach the 98% threshold because they borrow slowly, and the balance remains low. Some borrowers borrow more quickly, the balance rises faster, or their loans are much older, and their loans are assigned to HUD when their balance reaches 98% of the home's original value (or 98% of the maximum lending limit if that was lower). However, the 150% has no bearing on the assignment to HUD.
| Sergio S. March 19th, 2020 |
