Just like forward mortgages were set to spike in the new year, the Federal Housing Administration has also increased the maximum reverse mortgage claim amount in 2020.
The new HECM limit in 2020 will increase from $726,525 (2019) to $765,600. This is the fourth time the Federal Housing Administration increased the HECM limit, and since 2018, the total increase in limit has compounded to $100,000.
The HECM limit is benched on 150% of the FHA's conforming loan limit for both Freddie Mac and Fannie Mae, both of which increased to well over $510,000.
But dissimilar to both Mac and Mae loan limits as well the Federal Housing Administration's forward mortgage limit, there are zero geographic differences for the new HECM loan limit.
The 2020 increase in reverse mortgage limit will affect all regions of the US, as well as special states and zones such as the US Virgin Islands, Hawaii, and Alaska. These are areas where the forward mortgage limit was set higher than the rest of the US.
What is a Reverse Mortgage?
Reverse mortgages are also referred to as HECM (Home Equity Conversion Mortgage). This is an effective financial vessel designed for senior citizens (age 62 and above), enabling borrowers the opportunity to convert a certain percentage of their home equity into cash. The conversion to cash does not come with further monthly payments.
These loans are essentially made by private lenders, however, the loans are insured by the federal government. What this does is guarantee that the borrowers will not end up owing more than the actual worth of the property.
In addition, the borrowers can stay in the house for the rest of their natural lives; however, they have to be able to make their insurance and property tax payments. Moreover, they also need to invest in keeping the house well maintained and retain the property as their main residence.
The Implications of the Increase in the Reverse Mortgage Limit
With a $40,000 increase from 2019's HECM loan limit, this does boast plenty of opportunities. For example, existing borrowers will be able to take out more equity from their homes, leveraging a federally-backed reverse mortgage.
At the same time, it will also accentuate the number of new borrowers qualifying for HECM loans. But more importantly, due to the fact that HECM stipulates borrowers to pay their existing mortgage in full before they can jump on getting a new loan, there are many borrowers that have fat balances they owe and cannot qualify.
However, with the increase in the limit, the very same borrowers will be able to have enough money to make their new loans work.
As per the Federal Housing Administration, the new home equity loan limit will be effective immediate from the January 1st to December 31st, 2020.
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