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What Determines How Much a Borrower Can Receive on Any of the Various Options?
What Determines How Much a Borrower Can Receive on Any of the Various Options?

Under a HECM reverse mortgage program, the sole source of loan repayment is the eventual sale of the property. For the investor and/or insurer to avoid loss, the property value when the HECM terminates must be at least equal to the debt balance at that time plus the cost of selling the property,. If the value is higher, the excess goes to the borrower if she has moved out of the house permanently, or to the borrower’s estate if she has died. If the property value is less than the debt plus marketing cost, the loss is a charge against an FHA reserve account which is funded by mortgage insurance payments.

To minimize losses, draw amounts are calculated so that in the vast majority of cases, the loan balance is less than the recoverable property value at termination. This means that:

  • The higher the current property value, the larger the allowable draws.
  • The higher the interest rate used to calculate future loan balances, the smaller the allowable draws.
  • The higher the assumed rate of property appreciation, the larger the allowable draws.
  • The higher the initial settlement costs on the HECM, the smaller the allowable draws.

In addition, it matters when draws are made: the maximum allowable monthly draw can sum to a total considerable larger than the maximum cash draw at closing.