The FHA loan limit (also called lending limit) is effectively the maximum appraised value FHA will allow to determine HECM reverse mortgage proceeds. The lending limit is not the maximum that can be borrowed or lent in the future; it’s simply a cap on home value for purposes of determining how much you qualify for at the start of the loan.
To see how the lending limit impacts proceeds, let’s first cover the basics about how proceeds are calculated.
How proceeds are calculated
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). PL factors are published in publicly-available tables by FHA.
Once we have the appropriate PL 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. The principal limit is the gross pool of cash available before mandatory obligations are paid.
As an example, let’s assume the maximum claim amount is $300,000 and the appropriate PL factor is 0.50. To calculate the principal limit, we simply multiply the PL 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 works out to be $150,000, or 50% loan-to-value. This is the total pool of cash available to pay mandatory obligations such as existing mortgage balances, closing costs, property charges due at closing, set-asides, etc.
How the loan limit impacts proceeds
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 PL factor is again 0.50.
Remember, the lending limit is the value of the home or the lending limit, whichever is less. The lending limit is higher today, but let’s assume it’s 2020 and the lending limit is still $765,600. Because the home value is higher than the lending limit, the maximum claim amount equals the lending limit. The principal limit is 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 loan limit is not
The term lending limit or loan limit is something of a misnomer because it implies a limit on future borrowing in the minds of many reverse mortgage applicants. The lending limit only limits the initial proceeds. It does not cap how much you can borrow over time, how high your loan balance can go, how much the lender can lend, etc.
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.
FHA loan limits
FHA periodically adjusts the loan limit to reflect conditions in the housing markets. The loan limits are as follows for case numbers assigned on or after:
- 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