Updated January 2023. The HECM loan limit (also called HECM lending limit) is effectively a cap on the appraised value for purposes of calculating proceeds. FHA periodically revises the loan limit to reflect housing market conditions. We’ll cover what the current lending limit is and how it impacts HECM proceeds.
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What is a Reverse Mortgage?
A reverse mortgage is a unique home loan designed to give you access to a portion of your home’s value without a mortgage payment and without giving up ownership of your home.
The most popular reverse mortgage in America is the home equity conversion mortgage, or HECM (often pronounced heck-um by industry insiders).
Congress created the HECM as part of the Housing and Community Development Act of 1987, which was signed into law by President Reagan.
HECMs are funded by private lenders, but insured and regulated by the Federal Housing Administration (FHA).
The minimum qualifying age for a HECM is 62. If you’re married, only one spouse needs to be at least 62. The younger spouse can qualify as a non-borrowing spouse.
No mortgage payments are required as long as at least one borrower (or non-borrowing spouse) lives in the home and pays the property taxes, homeowner’s insurance, and HOA dues (where applicable).
The loan becomes due and payable when the last borrower or non-borrowing spouse permanently leaves the home.
You remain the owner of your home and you’re free to leave it to your heirs. Your heirs can keep the home by paying off or refinancing the loan balance. If your heirs don’t want the home, they can sell it, pay off the loan, and keep the remaining equity.
Your heirs can also let the lender sell it if they don’t want to keep the home or deal with selling it.
The HECM is a non-recourse loan, which means the most that will have to be repaid is the value of your home. FHA covers the shortage if your home isn’t worth enough to pay off the entire balance.
How Proceeds Are Calculated
Proceeds are calculated based on a few different factors, including home value, current interest rates, how the loan is structured, the age of the youngest borrower or non-borrowing spouse, and the HECM loan limit. There is no set amount that applies to every homeowner.
To calculate proceeds, we need to first determine the correct principal limit factor (PL factor) based on the age of the youngest borrower or non-borrowing spouse and the expected interest rate (EIR).
Principal limit factors are set by FHA.
Once we have the appropriate principal limit factor, we multiply it by the maximum claim amount to determine the principal limit. The maximum claim amount is equal to the value of the home or the lending limit, whichever is less.
As an example, let’s assume the maximum claim amount is $300,000 and the appropriate principal limit factor is 0.50. To calculate the principal limit, we simply multiply the principal limit factor by the maximum claim amount:
$300,000 (maximum claim amount) * 0.50 (PL factor) = $150,000 (principal limit)
As you can see, the principal limit in this example is $150,000, or 50% loan-to-value. This is the total pool of cash available to pay mandatory obligations like existing mortgage balances, closing costs, property charges due at closing, set-asides, etc.
The remaining portion of the principal limit is available for allocation to lump sum, line of credit, term income/tenure income, or some combination of these options.
How The HECM Loan Limit Applies
To see how the lending limit applies, let’s look at another example. For this example, let’s assume we’re working with a home value of $1,000,000. Let’s assume the same age and expected interest rate as before, which means the principal limit factor is again 0.50.
Remember, the maximum claim amount equals the lesser of the home value or the lending limit. The lending limit is higher today, but let’s assume it’s still 2020 and the limit is still $765,600. Because the home value is higher than the limit, the maximum claim amount equals the lending limit. Proceeds are calculated as follows:
$765,600 (maximum claim amount) * 0.50 (PL factor) = $382,800 (principal limit)
As you can see, the principal limit in this example is $382,800, or 38.3% loan-to-value. Again, the lending limit simply caps the home value for purposes of calculating proceeds.
What the HECM Lending Limit Is Not
The term loan limit is somewhat of a misnomer because it implies that it’s a cap on the loan balance, which is not the case. The limit is not a cap on how much you can ultimately borrow.
If your loan balance ever reaches or exceeds the lending limit, your loan is not going to be called due and you’re not going to be asked to start making mortgage payments.
Again, the loan limit is only used to calculate proceeds at the start of the loan.
The Current Reverse Mortgage Limit
FHA periodically adjusts the HECM loan limit to reflect housing market conditions. The past and current reverse mortgage limits are as follows:
- January 1, 2023: $1,089,300 (Mortgagee Letter 2022-21)
- January 1, 2022: $970,800
- January 1, 2021: $822,375
- January 1, 2020: $765,600
- January 1, 2019: $726,525
- January 1, 2017: $636,150
- January 1, 2011: $625,500
Frequently Asked Questions
What happens when reverse mortgage reaches limit?
Nothing happens. The limit is simply a cap on your home’s appraised value for purposes of calculating proceeds during the application process. There is no limit on how much you can ultimately borrow. If your loan balance reaches the limit, the loan isn’t called due, you don’t have to start making payments, etc. Again, nothing happens.
What is the new HECM lending limit for 2023?
The new limit for 2023 is $1,089,300. The limit is not a cap on how much you can borrower. It simply caps the appraised value of your home for purposes of calculating proceeds during the application process.
