Once a homeowner aged 62 or older learns the general characteristics of a reverse mortgage, they usually want to find out how much the loan can offer in proceeds. This can be done in a number of ways: by looking up a reverse mortgage revenue calculator on websites (not always an accurate indicator); through telephone conversations with various lenders; or through an in-person appointment with a loan officer who will provide the senior with actual numbers for verification. Because a senior will want to know enough about the loan officer to be confident that they are providing accurate information, an in-person interview is recommended whenever possible.
In a face-to-face interview, a loan officer will typically use a reverse mortgage comparison sheet to show what returns the homeowner can expect. This sheet contains various loan products offered by the lender. Currently only government-insured home equity conversion mortgages known as HECMs are widely available. The main differences are whether the product is a fixed or monthly adjustable interest rate HECM.
The heart of a reverse mortgage comparison sheet contains columns of numbers labeled with names that make little or no sense on first reading. The first label that comes to mind (because it’s usually at the top of the list of terms and numbers) is “The Maximum Claim Amount”.
The maximum claim amount is actually one term of insurance. If you think about it like this, you can better understand where the number comes from. The FHA has a maximum limit (currently $636,150) on the home value that it will insure. Simply put, FHA is willing to insure a reverse mortgage on the appraised value of the home up to the maximum exposure limit. So if a home is valued at $400,000 by an FHA-approved appraiser, the maximum claim amount is $400,000. On the other hand, if a home is valued at $700,000 by an FHA-licensed appraiser, the maximum claim amount is $636,150, or the current maximum that the FHA insures.
The maximum claim amount is generally estimated until the senior receives advice from a HUD-licensed reverse mortgage advisor, an application is signed by the borrower(s), and an FHA case number is assigned. Only then does an FHA-approved appraiser perform a physical appraisal to assign a value to the home.
Although the maximum claim amount can be $636,150 and a home can be worth $800,000, don’t expect an HECM to provide $636,150 in proceeds to the homeowner. The maximum claim amount is only one of three factors used to determine the revenue that can be offered. The other two factors are the age of the youngest borrower (must be at least 62 years old) and the current expected interest rate (based on the current 10-year London Interbank Offered Rate or LIBOR rate, plus a specified margin for the HECM adjustable rate and based on the current fixed rate for the fixed rate reverse mortgage). As a rule of thumb, the higher the maximum loan amount, the higher the proceeds available to the borrower; the lower the maximum receivable amount, the lower the proceeds available to the borrower.
Take a little time and learn what terms like “Maximum Receivable Amount” mean on a reverse mortgage loan comparison sheet. Knowing this can help you make an informed decision about whether an HECM Reverse Mortgage is a loan product that could help you now or in the future.