Originating: The Jumbo Option

Written by Kent Kopen

Jumbo reverse mortgages are designed for homeowners who want to borrow more than the FHA maximum amount or for situations in which the borrower would not qualify under FHA’s HECM rules.

Today, there are two types of reverse mortgages available: FHA-insured Home Equity Conversion Mortgages, and the newest iteration of a proprietary reverse mortgage frequently referred to as a jumbo reverse mortgage. Jumbo reverses were prevalent 10 years ago, but they largely disappeared with the demise of the asset-backed securities market in 2008.

Most prospective borrowers believe they can borrow about half or more of the value of their home. The purpose of this article is to clear up one of the biggest consumer misconceptions: how much (or how little) a homeowner can borrow with a reverse mortgage if their home is worth more than $600,000.

It invariably takes a bit of conversation to explain how the maximum loan amount (also known as a principal limit) is calculated. Principal limits are the product of MCA (value) times a principal limit factor (PLF), which is based on the youngest borrower’s age. PLFs are just numbers published in a table by HUD.

Loan amount = MCA x PLF

Value is more complicated than homeowners realize. They often think it’s what their house would sell for today. HUD, however, uses a proxy for value known as a maximum claim amount (MCA).

MCA is the lesser of:
-Appraised value
-National Lending Limit (NLL), recently increased to $636,150
-Purchase price (if loan is to buy the house)

Trying to explain all this to a homeowner usually results in their eyes glazing over. It gets even more confusing when their home is worth more than the National Lending Limit because any value over $636,150 does not count.

Thus, an $800,000 house has the same MCA as a $636,150 house, because it’s the lesser of the appraised value or NLL. Since NLL is capped at $636,150, which is less than $800,000, the MCA is $636,150.

For years after the recession, seniors with more expensive homes had no choice other than an FHA HECM. If they owned a $2 million home, and they were 62, they could borrow about $328,000.

They were never happy when they heard that. They expected to be able to borrow about half of the value of their house. Those who were mathematically inclined would note that they were being offered less than 17 percent of what their house was worth.

A few lenders recognized this gap and have reintroduced a proprietary home equity conversion mortgage, usually under their own trade name. There are only a few lenders offering jumbo reverses, and their guidelines frequently change, but we’ll cover some of the highlights below.

First, even with a “jumbo” reverse, borrowers cannot get as much as they’re expecting or want. The average 62-year-old homeowner with a house worth $900,000 thinks they can borrow at least $450,000—about half—but they can’t.

Below are three charts, differing by house value, that show how much a homeowner can access with an FHA-insured HECM (green line) and a proprietary jumbo reverse (blue line). The left-hand side of each chart shows the borrowing limit if the youngest borrower is 62. The right-hand side shows the maximum loan amount if the youngest borrower is 90.

 

Interesting Observations

-The principal limits for the FHA loan on the $600,000 and $900,000 houses are very similar.

-Jumbo reverse principal limits are low, especially at values under $1 million.

-On a $900,000 house, a borrower can get more on an FHA loan than with a jumbo, even though the FHA loan capped the house’s value at $636,150.

-The principal limit graph for jumbo reverse mortgages is not a smooth line.

Two reasons jumbo loan amounts are smaller:

ONE The secondary market is not very liquid; there are few market makers.

TWO They don’t have government insurance.

FHA mortgage insurance, among other things, protects banks if the loan balance exceeds the value of the house at the end. Jumbo reverse lenders don’t have that protection, so they’re more conservative in how much they’ll lend.

The takeaway is this: Jumbo reverse mortgages are attractive when house values are greater than $1.2 million and borrowers are over 70.

The following are a few other highlights of proprietary reverse mortgages. Realize that different lenders have different guidelines and they change all the time.

-They are currently available in 14 states: Arizona, California, Colorado, Connecticut, Florida, Hawaii, Illinois, New Jersey, Oregon, Pennsylvania, Rhode Island, South Carolina, Texas and Virginia.

-Borrowers must own the home for 12 months.

-Borrowers can own up to four other financed properties.

-The house cannot be listed for sale in the previous six months.

-Properties valued up to $6 million.

-Fixed rate only

-Any proceeds not drawn at closing cannot be taken later.

-Residual income must be 1.75 times the primary residence and revolving/installment debt.

-There are stricter credit guidelines, requiring essentially 24 months of perfect credit.

-Brokers cannot pay or credit any fees.

-Closing costs may be paid by the seller, unlike current FHA rules.

-Jumbos can be taken on non-FHA-approved condos worth over $500,000.

-There is no 60 percent limit in year one; the full amount can be taken at closing.

Those last two points are important.

First, many condo owners would like to get a reverse mortgage, but their condo project is not FHA-approved. With a jumbo reverse, that’s OK. The condo must, however, be warrantable by FNMA. Warrantability is only granted if:

-The project (including all common areas) is fully completed and the common areas are insured.

-The homeowner association is controlled by unit owners (not the developer or builder).

-50 percent or more of the units are owner-occupied.

-No one person owns more than 10 percent of the units.

Second, recent changes have limited the amount reverse mortgage borrowers can take out at closing. This is referred to as the 60 percent rule. Jumbos do not follow this rule. This nuance requires thought when a jumbo offers a smaller principal limit than its FHA counterpart, but it offers more cash at closing because it is not subject to 60 percent of the principal limit being available in year one. There may be instances where the cash at closing amount is the most important consideration.

The jumbo reverse mortgage is a particularly good topic for those looking to build relationships with financial advisors, because advisors tend to work with higher-net-worth clients, who obviously have more expensive homes. Also, most advisors don’t realize there is a jumbo option.