Once a senior homeowner 62 years or older learns the general features of a reverse mortgage, they usually want to find out how much the loan can offer in proceeds. This can be done in several ways: by looking up a reverse mortgage proceeds calculator on websites (not always an accurate indicator); by talking to various lenders by phone; or by face to face appointment with a loan officer who brings actual figures to the senior for their review. Since a senior will want to know enough about the loan officer to trust they are providing accurate information, a face to face interview is recommended whenever possible.
In a face to face conversation, a loan officer will usually use a Reverse Mortgage Comparison Sheet to show what proceeds the homeowner can expect to receive. This sheet contains different loan products offered by the lender. Currently, only government insured Home Equity Conversion Mortgages known as HECMs are widely available. The primary differences will be whether the product is a fixed rate or monthly adjustable rate HECM.
The heart of a Reverse Mortgage Comparison Sheet contains columns of numbers that are labeled with names that may make little or no sense when read for the first time. The first label that comes to mind (because it’s usually near the top of the list of terms and numbers) is “The Maximum Claim Amount.”
The Maximum Claim Amount is actually an insurance term. Thinking of it that way will help in understanding where the number comes from. FHA has a maximum limit (currently $636,150) of home value that it will insure. Put simply, FHA is willing to insure a reverse mortgage for the appraised value of the home up to the maximum claim limit. Therefore, if a home is appraised by an FHA approved appraiser at $400,000, the Maximum Claim Amount will be $400,000. On the other hand, if a home is appraised by an FHA approved appraiser at $700,000, the Maximum Claim Amount will be $636,150 or the current maximum limit that FHA will insure.
The Maximum Claim Amount is generally estimated until the senior receives counseling by a HUD approved reverse mortgage counselor, an application is signed by the borrower(s), and an FHA Case Number is assigned. Only then does an FHA approved appraiser physically conduct an appraisal to assign a value to the home.
Although the Maximum Claim Amount may be $636,150 and a house may be worth $800,000, do not expect a HECM to provide the homeowner with $636,150 of proceeds. The Maximum Claim Amount is only one of three factors used to determine the proceeds that can be offered. The other two factors are the age of the youngest borrower (must be at least 62), and the current expected interest rate (based on the current 10 year London Interbank Offered Rate, or LIBOR rate, plus a stated margin for the adjustable rate HECM and based on the current fixed interest rate for the fixed rate reverse mortgage). The rule of thumb is: the higher the Maximum Claim Amount, the higher the proceeds available to the borrower; the lower the Maximum Claim Amount, the lower the proceeds available to the borrower.
Take a little time and learn what the terms such as Maximum Claim Amount mean on a Reverse Mortgage Loan Comparison Sheet. Such knowledge can help in making an informed decision about whether a HECM Reverse Mortgage is a loan product that could help you either now or in the future.