2021 Increase on HECM Loan Limits
For the fifth consecutive year, the Federal Housing Administration (FHA) raised its lending limit on all FHA loans, including the home equity conversion mortgage (HECM).
Often referred to as a reverse mortgage, the HECM program enables eligible homeowners to access the wealth they’ve built by converting a portion of home equity into disposable loan proceeds — and the new HECM limits mean that borrowers may now be able to significantly increase their monthly cash flow to improve their finances and live the life they deserve.
- Effective January 1, 2021, the FHA lending limit will increase to $822,375 on single-family loans.
- The new 2021 HECM limit is up 7.42% from the 2020 MCA of $765,600.
- The FHA “floor” limit of $356,362 applies to one-unit properties in low-cost housing areas.
- FHA limits are determined by the national conforming loan limit set by Fannie Mae and Freddie Mac.
- This may benefit some reverse mortgage applicants, as the increased HECM limit may allow borrowers to access more money through loan proceeds.
Read on to learn about the recent changes to FHA HECM loan limits for 2021, or use the links below to navigate ahead to the section you’re most interested in.
- What are the new FHA loan limits for 2021?
- How do FHA limits regulate housing?
- How are FHA lending limits determined?
- How does the HECM limit affect reverse mortgages?
- Does the increased HECM limit mean more money?
- What are the FHA loan requirements?
- Who can I ask for help about reverse mortgages?,/span>
What are the new FHA loan limits for 2021?
Effective January 1, 2021, the FHA lending limit will increase to $822,375 on single-family loans. The U.S. Dept. of Housing and Urban Development (HUD) recently published a press release at HUD.gov, noting the new mortgage limit will apply to both reverse mortgages through the HECM program, as well as forward-facing mortgages insured by the FHA.
FHA HECM Limit
A HECM, or reverse mortgage, is a type of loan designed for homeowners who have already built equity in their home. It enables eligible borrowers to improve their financial circumstances by converting a portion of home equity into cash proceeds but does not require them to move out or sell the property.
Should a borrower default on the loan, then FHA mortgage insurance will cover the lender’s losses up to the maximum claim amount (MCA), also known as the “HECM limit”.
HECM loan limits have climbed over the last five years; based on the information provided by the FHA in Mortgagee Letter 20-42, the new 2021 HECM limit is up 7.42% from the 2020 MCA of $765,600. This allows lenders to consider a significantly larger portion of equity when calculating the potential value of a reverse mortgage.
FHA Ceiling Limit
The FHA limit for forward mortgages is set at $822,375 in the calendar year (CY) 2021, effective for case numbers assigned on or after January 1. But unlike HECM loan limits that apply universally to all properties nationwide the FHA “ceiling” on Maximum Mortgage Limits only places a cap on federally-insured Title II loans in high-cost areas, as defined by Mortgagee Letter 20-41.
FHA Floor Limit
For CY 2021, the FHA “floor” limit of $356,362 applies to one-unit properties in low-cost housing areas. Although the FHA floor only applies to forward mortgages, not reverse mortgages, it’s worth noting that the agency continues to carry on its historical mission of providing affordable housing opportunities to families with lower income.
How do FHA limits regulate housing?
The FHA began regulating the residential housing industry in response to the market crash during the Great Depression. At the time, many Americans lost their homes because the severe banking crisis forced lenders to immediately seek out unpaid borrowers.
In order to reduce foreclosures and restructure the housing industry, Congress enacted the National Housing Act of 1934 (NHA), which included legislation that created the FHA, along with Fannie Mae and Freddie Mac.*
*Note: Fannie Mae is the common name for the Federal National Mortgage Association (FNMA), and Freddie Mac is short-hand for Federal Home Loan Mortgage Corporation (FHLMC).
Together, these two agencies help regulate the housing market by essentially limiting the dollar amount of conventional mortgages issued by private lenders who “conform“ to the federal terms in order to meet funding criteria.
Although the FHA didn’t become an official part of HUD until 1965, it revolutionized homeownership by offering federal mortgage insurance to agency-approved lenders. This provided protection in the event that a borrower couldn’t repay their loan, allowing lenders to qualify individuals who likely could not afford housing otherwise.
Economic stimulation increased the single-family housing market and thousands of Americans still rely on two forms of these government-sponsored loans today: the home equity conversion,/span> mortgage (HECM) and the Title II mortgage.
How are FHA limits determined?
FHA limits are determined by the national conforming loan limit set by Fannie Mae and Freddie Mac ($548,250 in 2021). Recently, the NHA was amended by the Housing and Economic Recovery Act of 2008 (HERA), which now requires the FHA to establish ceiling and loan limits.
- The FHA floor is 65% of the national limit ($356,362 in CY 2021); the floor applies to areas where 115% of the median home price is less than the floor limit.
- Any area where the national limit exceeds the floor is considered high-cost; HERA requires the FHA to set its ceiling for high-cost areas at 150% of the national limit ($822,375 in CY 2021).
- FHA floors and ceilings are calculated based on median home prices throughout a Metropolitan Statistical Area (MSA); HUD has utilized the county within the MSA that has the highest median price point for reference since HERA was enacted.
The 2021 FHA increase raised the maximum loan limits in 3,108 counties, but had no effect on 125 counties due to HERA guidelines. Borrowers looking to obtain government assistance for the purchase of their first home can check the status of their location by using the FHA loan limit tool online to see if any limits apply.
How does the HECM limit affect reverse mortgages?
Current FHA regulations prohibit the HECM limit to vary by MSA, so the higher maximum claim amount (MCA) applies to all reverse mortgages, regardless of where the property is located. The higher loan limit also applies to Freddie Mac’s special exception areas, including Alaska, Hawaii, Guam, and the Virgin Islands.
Does the increased HECM limit mean more money?
The amount of money a borrower can receive through a reverse mortgage is known as the principal limit (PL) and depends on several factors, including the MCA. The MCA refers to the total pool of cash available to borrowers at closing to pay off an existing mortgage (if applicable), supplement assets, increase cash flow, or secure a line of credit.
When determining the MCA, the lender will consider the homeowner’s appraised property value or $822,375 (2021), whichever figure is less. So, the increased HECM limit may allow borrowers to access more money through loan proceeds provided that an FHA-approved appraiser estimates the property to be valued at $822,375 or more.
The new FHA loan limit would allow impacted borrowers to tap into more home equity to achieve greater financial freedom.
The FHA allows lenders to lend a percentage of the MCA based on the age of the youngest borrower and current interest rate at the time of application; these variables are known as principal limit factors. HUD.gov publishes PL factor tables that are used to calculate the amount of proceeds available for FHA insurance.
Generally, older borrowers qualify for higher principal limits. For example, for case numbers issued on or after 10/2/2017, assuming a 4% interest rate, the appropriate PL factor for the borrower at the age of 75 is 0.547, compared to the PL factor of 0.522 at the age of 70.
In this case, if the property was appraised at $500,000, a reverse mortgage calculator would use the following formula:
$500,000 (MCA) x 0.547 (PL factor) = $273,500 (PL)
The net principal limit is the remaining funds available once all mandatory obligations are paid, such as closing costs and mortgage insurance. Borrowers may elect to receive their cash loan proceeds in a lump sum, monthly installment, or line of credit.
Lenders assess their own interest rate at the time of application using an index and margin, and the rate can be either fixed or adjustable. However, borrowers are not required to make monthly payments toward the principal balance nor compounded interest until the loan reaches a maturity event, such as selling or vacating the home.
What are the HECM loan requirements?
Although the PL factor tables reference every age between 18 to 99, borrowers must be age 62 or older to qualify for a HECM loan, the most common type of reverse mortgage. Additional eligibility requirements outlined at ConsumerFinance.gov state that:
- You must own substantial home equity (or own your home outright).
- You must occupy the property as your primary residence.
- You may not be delinquent on any federal debt.
- You must agree to meet ongoing financial obligations, such as property taxes.
- Your home must meet the FHA minimum property standards.
- You must attend a HUD-approved counseling session.
Who can I ask for help about reverse mortgages?
To discuss your reverse mortgage eligibility or explore how the increased FHA limit can benefit your financial circumstances, contact a Mortgage Specialist who will be happy to answer any questions you may have. You can also refer to our reverse mortgage FAQ and download the reverse mortgage guide for more information.