Courtesy of Tom Kelly

By Tom Kelly

While job cuts and dwindling investment accounts continue to plague wage-earning households, many seniors wonder how long their once-healthy retirement funds will provide them with the cash needed for their leisure years.

Some good news arrived recently, especially for older homeowners who continue to make mortgage payments on their primary residence. The economic stimulus bill signed into law raises the single national loan limit for the country’s most popular reverse mortgage to $625,500 from the previous ceiling of $417,000.

“This is a great opportunity for seniors to tap into additional funds to offset losses they may have experienced in the current economic environment,” said Sarah Hulbert, who leads the reverse mortgage division of Seattle Mortgage, a national reverse mortgage lender. “There are a great number of seniors in homes valued significantly over the old limit of $417,000 limit who will be able to maintain or enhance their standard of living through the implementation of this new loan limit.”

The Federal Housing Administration, a component of the Department of Housing and Urban Development, insures the nation’s most popular reverse mortgage, known as the home equity conversion mortgage, or HECM. Because of the present credit crisis, other private reverse mortgage “jumbo” funds have virtually evaporated.

A reverse mortgage historically has enabled senior homeowners to convert part of the equity in their homes into tax-free income without having to sell the home, give up title, or take on a new monthly mortgage payment. Reverse mortgages are available to individuals 62 or older who own their home. Funds obtained from the reverse mortgage are not taxed. Here are the vitals of the new guidelines:

• All areas of the continental United States, as well as Alaska, Hawaii, Guam, and the Virgin Islands, will operate under a single HECM loan limit of $625,500.
• The $625,500 limit applies to both regular HECM transactions and HECM for Purchase.
• The current fee structure remains unchanged. HUD will continue to collect a 2% mortgage insurance premium upfront and 0.5% annually.
• The maximum origination fee will remain $6,000.  

Darryl Hicks, vice president of the National Reverse Mortgage Lenders Association (NRMLA), a nonprofit trade group based in Washington, D.C., said there is anecdotal evidence that reverse mortgages are helping seniors avoid foreclosure, but the organization has no hard data to support the claim. NRMLA expects even more activity with the new loan ceilings as seniors look for ways to escape monthly mortgage payments.

The Housing and Economic Recovery Act of 2008 approved the HECM for Purchase program, allowing lenders to close the mortgages after January 1, 2009. The move allows older homeowners to make a large down payment on a new home and then utilize the reverse mortgage as permanent financing.

The same law reduced the maximum loan fee on reverse mortgages to 2% on the initial $200,000 of the home's value and 1% on the balance thereafter, with a cap of $6,000. Previously, HECM fees were capped at 2% of the home's value, or the county lending limit, whichever was lower.

In October 2008, Congress gave HECMs, which make up more than 90% of all reverse mortgages, a common loan ceiling of $417,000, regardless of location. Previously, the HECM program assigned different lending limits by county. These ranged from $200,160 in rural areas to $362,790 in the highest home value areas. The $417,000 limit enabled borrowers to obtain a substantially greater benefit from their homes, but the ceiling still was simply regarded as too low for higher-end homes. Lenders immediately began to lobby for the $625,500 number, and the stimulus bill supplied the increase.

However, not everyone qualifies for the maximum. A borrower’s age, along with prevailing interest rates, determine the actual amount of the HECM. Older borrowers qualify for the greatest amounts.

While the 4.3% increase in the number of FHA-insured HECMs was down significantly in 2008 from previous years, it bettered the negative numbers of conventional loans. One reason for the lower HECM volume was the uncertainty over the loan limits. A significant number of seniors were waiting on the sidelines to see what the new loan limits would be.

With the present state of the economy, the increased limits will be beneficial.

[Editor’s note: Join Tom Kelly for “Reverse Mortgage Your Way to Retirement” at 2 PM EDT, August 10, 2010. This compelling FREE webinar will explain to seniors and adult children how persons over the age of 62 can use a reverse mortgage to buy a retirement home today, taking advantage of lower prices in many areas like Florida and Arizona. Click Webinars to learn more.]