8197 / Are there any limits on the amount of reverse mortgage disbursements that a taxpayer is entitled to receive within the first twelve months of closing?

Yes. The U.S. Department of Housing and Urban Development (HUD) has conducted studies finding that borrowers under reverse mortgages who received all of the proceeds of the mortgage at the time of closing, or shortly after closing, had a substantially higher risk of default on the mortgage. As a result, new limitations have been introduced to ensure that taxpayer-borrowers are able to meet their financial obligations and remain in homes that are subject to reverse mortgages.

The maximum value that a taxpayer is entitled to receive from a reverse mortgage at the time the loan is closed, or within the first 12 months after closing, is now limited to 60 percent of the “principal limit” or the sum of “mandatory obligations” plus 10 percent of the principal limit.¹ After the first 12 months, the taxpayer is entitled to access the remainder of the loan.

A taxpayer’s principal limit for a HECM reverse mortgage is essentially the maximum amount that the taxpayer is entitled to receive from the HECM before any disbursements are made. It is calculated using a formula that is based upon the age of the borrower, the expected average mortgage interest rate and the maximum claim amount that may be drawn under the loan (which factors in the value of the home and is subject to the overall cap discussed in Q Q 8184). See Q Q 8184 for a discussion of how the amount that will be available through a reverse mortgage is calculated.

Mandatory obligations include, but are not limited to, expenses such as origination and closing fees, any current mortgage debt, federal tax debt, certain repair expenses required as a condition of closing, the initial mortgage insurance premium (MIP, see Q Q 8192), and fees required for warranties and inspections.²

These new limitations are effective for reverse mortgages issued on or after September 30, 2013.