FHA Reduces Cash Payouts on HECM Loans

by Karen Lawson
October 6th, 2009

In a move to address an estimated shortfall of $798 million within the next fiscal year, FHA Commissioner David H. Stevens has announced cuts in the amounts seniors can receive under FHA’s popular reverse mortgage program. Effective with applications received on and after October 1, 2009, the FHA Home Equity Conversion Mortgage (HECM) loans will provide 10 percent less cash to seniors.

How Revised FHA Guidelines Affect HECM Borrowers

A reverse mortgage loan is an option for borrowers aged 62 and above who want to convert home equity to cash and eliminate monthly mortgage payments. Falling property values have led to narrower margins between home value and home equity, and FHA guidelines reducing the amounts seniors can receive with a HECM loan may put reverse mortgage loans beyond the reach of some borrowers. Reduced FHA loan limits can make it more difficult to cover the cost of paying off an existing mortgage, meeting closing costs on the new HECM mortgage. Seniors who need to use the proceeds of a HECM loan for living expenses may find that there’s not much cash left  after paying off their existing mortgage and costs of their reverse mortgage loan.

Borrowers on Fixed Income: Reverse Mortgage as Life Raft

Homeonwers who live on a fixed income or otherwise have limited resources may find their existing  mortgage payments too high. Taking out a reverse mortgage can help these homeowners by eliminating monthly mortgage payments and possibly providing extra cash for paying taxes and hazard insurance and meeting living expenses. Borrowers with reverse mortgage loans are guaranteed the right to remain in their homes as long as they wish, and do not have to repay their mortgage loans unless they vacate the property securing the reverse mortgage loan. The change in FHA loan limits for  reverse mortgage payouts may result in some borrowers losing the opportunity to improve their finances with an FHA reverse mortgage loan.

Using a Reverse Mortgage Calculator

You can use a mortgage calculator to estimate potential benefits of getting a reverse mortage loan. Although the calculations provided don’t take into account regional variables and individual cirmstances, they can help in determining if a reverse mortgage loan may work for you.

FHA Cautions Homeowners Against Reverse Mortgage Scams

Although reverse mortgage loans are also available through conventional mortgage lenders, borrowers are cautioned to avoid “too good to be true” offers made through the mail or online. AARP provides consumer information about reverse mortgage loans here. FHA reverse mortgage counselors can also answer questions and provide information about FHA guidelines and reverse mortgage loans.

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