By Jack Guttentag
Under the new rules, borrowers can no longer draw 100 percent of the principal limit unless the draws are used to comply with FHA mandates. Mandatory draws include paying off all liens on the property, including the senior’s existing mortgage if there is one; all settlement costs; and any repairs needed to meet FHA property requirements. Cash draws within the first year for other than mandated purposes — I call these “pocket draws” — are limited to 60 percent of the principal limit less mandatory draws, or to 10 percent of the principal limit, whichever is greater. The dual mortgage insurance premium feature has been retained, but now it is based on whether or not total cash draws in the first year are above or below 60 percent of the principal limit.
It has always been the case that borrowers selecting fixed-rate HECMs had to draw cash at closing; they could not defer cash draws. This did not discourage use of fixed-rate HECMs so long as borrowers could draw 100 percent of their principal limit upfront, and virtually all those who drew maximum cash used fixed-rate HECMs. But under the new rules limiting pocket draws, the only seniors likely to opt for a fixed-rate HECM are those with large existing mortgage balances. The total of mortgage loan balances, other mandated draws and pocket draws up to 10 percent can be 100 percent of principal limit.
On adjustable-rate HECMs, a borrower is now subject to the new limits on cash draws at closing, but after a year they can draw the remainder of their principal limits. FHA seems to be assuming that the most cash-hungry borrowers will be deterred by having to go with an adjustable rate, and/or having to wait a year for a second helping. I have my doubts about that. If the only change is to shift a chunk of the cash withdrawals forward a year, expect FHA to come back in a few years with more draconian restrictions.
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