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New FHA HECM Rules: Determining The Principal Loan Amount

063Last week we reported on changes to the FHA Home Equity Conversion Mortgage loan program–changes announced by FHA and HUD that change the terms of the loan program for fixed rate HECMs and adjustable rate HECM loans. As of HECM loans with case numbers assigned on or after June 25, 2014, FHA HECM loans for fixed rate mortgages feature the following restrictions as per the FHA official site:

“FHA will only insure fixed interest rate reverse mortgages where the mortgage limits the mortgagor to:

–A single, full draw to be made at loan closing; and
–Does not provide for future draws by the mortgagor under any circumstances.”

The FHA also made changes to adjustable rate HECM loans–the FHA official site says:

“The Single Disbursement Lump Sum payment option shall not be used for adjustable interest rate HECMs.”

That covers some aspects of FHA HECM payment issues, but a question on many a borrower’s mind involves how the FHA will calculate the principal limit on an FHA HECM loan. According to FHA Mortgagee Letter 2014-11:

“Mortgagees will continue to determine the principal limit according to existing policy guidelines by multiplying the maximum claim amount by the principal limit factor corresponding to the age of the youngest mortgagor, and the expected average mortgage interest rate, until further notice.

“The expected average mortgage interest rate must be the same as the fixed mortgage (note) interest rate and set simultaneously. The principal limit for a fixed interest rate mortgage will “increase” each month by one-twelfth of the sum of the mortgage note interest rate plus the annual mortgage insurance rate, but no further funds may be made available for the mortgagor to draw against after the Borrower’s Advance.”

The mortgagee letter adds that future disbursements, “…from set-aside accounts can be made by the mortgagee for purposes defined for the specific set-aside. Mortgagees may continue to add accrued interest, mortgage insurance premiums, servicing charges and disbursements from repair or servicing fee set-aside accounts to the outstanding mortgage balance for fixed interest rate HECMs in accordance with existing FHA requirements. All other HECM program requirements remain applicable to fixed interest rate mortgages.”

These are important changes and borrowers should be fully aware of them before committing to an FHA HECM loan on or after June 25, 2014.

Do you have questions about FHA home loans? Ask us in the comments section. You can get information about applying or getting pre-approved for an FHA loan at FHA.com, a private company and not a government website.

 

Joe Wallace - Staff Writer

By Joe Wallace

June 23, 2014

Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.

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FHANewsBlog.com was launched in 2010 by seasoned mortgage professionals wanting to educate homebuyers about the guidelines for FHA insured mortgage loans. Popular FHA topics include credit requirements, FHA loan limits, mortgage insurance premiums, closing costs and many more. The authors have written thousands of blogs specific to FHA mortgages and the site has substantially increased readership over the years and has become known for its “FHA News and Views”.

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