Uh Oh! What If My Loan Balance Reaches the Reverse Mortgage Limit?

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Nobody likes nasty surprises when they’re already committed to something. Are there any lurking surprises that can force repayment of your reverse mortgage when it reaches a certain balance? Do you need to worry about your balance hitting a reverse mortgage limit?

Reverse Mortgage Limit Worries

I occasionally hear from readers concerned about a reverse mortgage limit. In other words, if your loan balance reaches a certain amount, will you be forced to start making payments or repay the loan in full?

I’d like to offer some important insights on this issue and hopefully put a few minds at ease. Yes, there are some situations that could call your reverse mortgage due. We’ll cover what you should and shouldn’t be concerned with.

But before I dig into the reverse mortgage limit issue, let me first cover some basics. The reverse mortgage is highly misunderstood, which is why there are rampant rumors circulating about it. 

If you’d like more detailed information than what we cover here, check out this article.

Reverse Mortgage Basics

A reverse mortgage is a unique home loan that enables seniors 62 or older to convert home equity into cash.

The most popular reverse mortgage in America today is the FHA-insured home equity conversion mortgage, or HECM (often pronounced heck-um by industry insiders). If you or somebody you know has a reverse mortgage, it’s likely they have a HECM.

No mortgage payments are required as long as at least one borrower (or non-borrowing spouse) lives in the home, maintains it, and pays the required property charges.

You always remain the owner of your home and you’re free to leave it to your heirs. Your heirs will inherit any equity remaining in the home.

The HECM is a non-recourse loan, which means the most that will ever have to be repaid is the value of your home. FHA covers any shortage if your home isn’t worth enough to pay off the entire balance.

Other so-called jumbo reverse mortgages exist as well, but the information we cover here will be related just to the HECM.

Why There Are Rumors About A Reverse Mortgage Limit

In my experience, worries about a reverse mortgage limit usually come from misunderstandings about:

  1. How the FHA lending limit works
  2. How the reverse mortgage lien is recorded on title
  3. Your ongoing HECM obligations.

If you happen to hear about a reverse mortgage limit of some kind, it’s probably in reference to either the FHA lending limit or how the reverse mortgage is recorded on title. I’ll explain more about both and show you why you don’t need to worry about them.

I’ll also clear up any misunderstandings about your ongoing obligations. Yes, there are situations that can make the HECM due and payable before the last borrower passes away, but they shouldn’t be a concern as long as you remain in good standing.

We’ll cover your basic obligations, which will also help reinforce why you don’t need to worry about numbers 1 and 2 above.

How the FHA Lending Limit Works

The FHA lending limit (also called the reverse mortgage loan limit) is a common source of reverse mortgage limit rumors and fears. Many seniors are afraid that the lending limit caps how much they can borrow. What if the loan balance hits the lending limit? Do you have to start repaying the loan? Do you lose your house? Not at all! The lending limit is used solely to calculate initial proceeds. To see how this works, let’s cover how the calculations work.

How much money a HECM offers depends on a few different factors, including home value, age of the youngest borrower (or non-borrowing spouse), and the current expected interest rate.

To determine how much you qualify for, the lender first establishes the maximum claim amount, which is equal to the lesser of the appraised value or the FHA lending limit.

The lender then selects the correct principal limit factor (PL factor) from the FHA principal limit factor tables based on the age of the youngest borrower (or non-borrowing spouse) and the current expected interest rate.

The principal limit factor is multiplied by the maximum claim amount to determine the principal limit, which is the total pool of cash available.

This probably sounds a bit complicated, so let’s look at an example. Let’s assume a home value of $400,000 and a principal limit factor of 0.50 based on age and the current expected interest rate.

Because the home value is less than the lending limit, we calculate the principal limit based on the home value:

$400,000 (maximum claim amount/home value) * 0.50 (PL factor) = $200,000 (principal limit)

In this case, the principal limit is $200,000. This is the total pool of cash available from the HECM.

Now, let’s check out an example where the lending limit comes into play. Let’s assume a home value of $1,500,000 and the same principal limit factor of 0.50 that we used before. Because the home value is more than the FHA lending limit (which is $1,149,825 as of this writing), we calculate proceeds based on the lending limit:

$1,149,825 (maximum claim amount/lending limit) * 0.50 (PL factor) = $574,913 (principal limit)

As you can see, the lending limit effectively caps the home value for calculation purposes. Again, proceeds are calculated based on the home value or lending limit, whichever is less.

The term lending limit is somewhat of a misnomer because it implies a limit on future borrowing. Naturally, this leads to worries about hitting a loan balance cap and being forced to repay the loan.

Folks, let me put your mind at ease: the lending limit is not a cap on your future loan balance. There’s no loan balance cap that will cause your loan to be called due. The lending limit is used solely to calculate the initial proceeds at the start of the loan.

The lending limit really could be referred to as a reverse mortgage home value limit. In other words, the home value is capped for purposes of calculating the initial proceeds.

How the Reverse Mortgage is Recorded on Title

Many reverse mortgage borrowers worry about a cap on their loan balance because of how the reverse mortgage lien is recorded against the title of your home.

Remember, the reverse mortgage is a home loan, which means a lien is recorded against the title of your home. This is how it works for any home loan, whether it’s a reverse mortgage or a traditional 30-year fixed. This is how lenders secure the money they’ve lent out.

Traditional “forward” mortgage lenders record the starting loan amount on title. For example, if you take out a traditional 30-year fixed with Wells Fargo for $300,000, a lien for Wells Fargo in the amount of $300,000 is recorded against the title of your home.

The original loan amount recorded on title is not updated as the loan is paid down. Twenty years down the road when you’ve paid off half the balance, the lien on title will still reflect the original $300,000 you borrowed.

If you want the current balance owed, you simply log into your mortgage account online or order a payoff. Again, the lien on title doesn’t necessarily reflect how much you actually owe on the mortgage.

Reverse mortgages are recorded on title a little differently than traditional mortgages. With a traditional “forward” mortgage, you borrow a set amount up front and pay it down over time.

With a reverse mortgage, you borrower relatively little up front and more over time. The reverse mortgage balance grows as you extract more equity out of the home. This is why reverse mortgage lenders record a large dollar amount – typically 150% of the principal limit – for the lien on title.

For example, if the principal limit is $300,000, the lender will likely record a lien for $450,000 against the title of your home. This doesn’t mean you owe $450,000 at the time of recording. This also isn’t a cap on how much you can borrow over time.

If your loan balance reaches the amount recorded on title, nothing happens. You’re not going to be asked to repay the loan simply because your loan balance reaches a certain number.

What? A Second Lien is Recorded on Title??

Many reverse mortgage borrowers are surprised to learn that not one, but two liens are recorded on title when they get a reverse mortgage. Yes, this is true!

The first lien is recorded for 150% of the principal limit and a tiny second lien is recorded for the benefit of the Department of Housing and Urban Development, which oversees the HECM program.

The HUD lien is simply a backup in case HUD takes over the servicing of your reverse mortgage at some point. If your lender goes out of business or your loan balance exceeds the maximum claim amount, HUD may end up servicing your loan. The second lien makes it easier for HUD to get repaid when the loan balance becomes due and payable.

Your Ongoing Reverse Mortgage Obligations

Folks, if you’re worried about a reverse mortgage limit, just remember your basic obligations under the reverse mortgage program: live in the home, maintain it, and pay your required property charges.

As long as you do these things, it’s highly unlikely you’re going to have any trouble with your HECM reverse mortgage. Again, there’s no cap on the loan balance that’s going to cause your loan to be called due and payable or force you to start making mortgage payments.

The most common situations that can trigger a maturity event and cause your loan to become due and payable are as follows:

  1. The last borrower or non-borrowing spouse passes away
  2. You permanently move out of the home
  3. You add or remove individuals from the title of your home without getting your lender’s approval first
  4. You fail to pay the required property charges
  5. You let the home fall into extreme disrepair
  6. You fail to respond to occasional lender requests for information

As you can see, loan balance is not on this list. Again, there’s no loan balance limit that will cause your reverse mortgage to become due and payable.

Hopefully This Puts Your Mind At Ease

If you were at all concerned about a reverse mortgage limit, hopefully this puts your mind at ease.

Again, no payments are required as long as you live in the home, maintain it, and pay the required property charges. The FHA lending limit and the lien amount recorded on title are not caps on how much you can borrow. You won’t be asked to start repaying the loan because your loan balance reaches the lending limit or the lien amount recorded on title.

Frequently Asked Questions

What happens when reverse mortgage reaches limit?

Nothing! Your obligations are to live in the home, maintain it, and pay the required property charges. As long as you do that, no payments are required.

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Mike Roberts Avatar
About Mike Roberts

Mike Roberts is the founder of MyHECM.com, a published author, and a highly experienced mortgage industry veteran with over a decade of mortgage banking experience. When he's not working, he enjoys spending time with his family, skiing, camping, traveling, or reading a good book. Roberts is the author of The Reverse Mortgage Revealed: An Industry Insider’s Guide to the Reverse Mortgage, which is available on Amazon.

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