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2017 Reverse Mortgage Update and Considerations

Major Reductions to How Much you Receive and MIP - Effective 10/2/17

On August 29, HUD issued Mortgagee Letter 2017-12.  This had two major changes.

1. They reduced the PLF - Principal Limit Factor.   This is a calculation that determines how much you receive in a reverse mortgage.  Regular mortgages would refer to this as the LTV or Loan to Value.

For a 62 year old, the minimum age, the benefit would be reduced by up to 22%.  The reduction differs by age and interest rates.  This is a major reduction.  In the past, over a 5 year period, FHA reduced the Principal Limit three times in smaller percentages.  This reduction without much notice is a major change.

For example, in very round figures, with the current system, a 62 year old with a home valued at $500,000, their benefit (Principal Limit) would be about $250,000.  A 50% LTV.  For all case numbers issued after October 2, 2017, that same person would have a benefit of about $200,000 - 225,000.  A 40 - 45% LTV.  The reason I show a range is because the adjustable interest rate (used about 70% of the time) is made up of an index and margin.  If lenders use a margin that is typical today, the reduction would be the 40% number.  If lenders reduce their margins to help maximize how much a borrower can get, the LTV would be closer to 45%.

2.  The MIP - Mortgage Insurance Premium - is being changed.  Both the upfront premium and the ongoing premium. 

The upfront premium will be 2.00%.  This is good news and bad news depending on your situation.  For a borrower who takes less than 60% of the funds available to them, the current MIP is 0.5%.  On a $500,000 home this would be $2,500.  At the new 2.00%, this would be $10,000.  Bad news.  This especially hurts those not needing a Reverse Mortgage now but are planning for the future.  For someone who would be taking more than 60% of the available funds, perhaps they have a big mortgage, their current 2.5% MIP would be $12,500.  So, with the new system, that would go down to $10,000 in my $500,000 example.  Good news. 

The ongoing premium would be reduced from 1.25% to 0.5%.  Mostly good news.  Except for those who have a balance near nothing and want their line of credit to grow.  They just lost 0.75% annual growth. 

For those in California, which has a 7 day 'cooling off' period between counseling and application, they would have had to have counseled and applied by about September 21 to allow for the cooling off period and for the case number to be pulled prior to October 2.  Since October 2 is a Monday, most lenders last day to pull a case number would be September 29.  .  In the past, with announcements like this, FHA counselor slots have filled up fast and many potential borrowers have not been able to make the deadline.

FHA Home Value Limits - Effective 1/1/2017. 

In early December, 2016, HUD increased the FHA limit to $636,150. 

In February, 2009, the FHA limit - the amount of the home value considered in the benefit calculation - was increased from $417,000 to $625,500.  It was due to expire at the end of 2009.  It has been extended one year at a time each year since then.  The industry was pleased to see this increase instead of a potential decrease.