The $60,000 Draw That Doesn't Fit the First-Year Cap
Rosa, 68, is single and applies for a HECM on a townhome appraised at $600,000. The property is below the HECM lending limit, so the maximum claim amount is $600,000, and the lender's principal limit factor for her age at the expected rate of 6.50% is 0.400 - a principal limit of $240,000. Her existing first mortgage payoff is $118,400. Estimated closing costs and the upfront mortgage insurance premium total $9,800, and the servicing fee set-aside is $5,200. No repairs are required, she has no LESA, and property charges are within her budget. Rosa wants $60,000 at closing: $48,000 for a bathroom renovation and $12,000 to retire a personal loan. Her contractor wants a $25,000 deposit at signing and will bill the rest later, and Rosa asks whether the lender can pay the contractor directly 'so the cash on paper looks smaller.' The rate lock expires in nine days.
1. Calculate the maximum cash Rosa can receive at closing and explain the rule you applied.
Read the worked answer
Use the initial disbursement limit: total disbursements during the first 12 months cannot exceed the greater of (a) 60% of the principal limit or (b) mandatory obligations plus 10% of the principal limit.
Mandatory obligations:
- Payoff: $118,400
- Closing costs and upfront MIP: $9,800
- Servicing fee set-aside: $5,200
- Total: $133,400
Compare:
- 60% x $240,000 = $144,000
- $133,400 + (10% x $240,000 = $24,000) = $157,400
The greater figure is $157,400. Cash to Rosa = $157,400 - $133,400 = $24,000.
Her $60,000 request exceeds the cap by $36,000. This is not a credit or LTV problem - the money exists inside her $240,000 principal limit; it is simply not available in the initial period. Telling her she 'qualifies for $240,000' without explaining the timing would be misleading.
2. Rosa proposes splitting the money: $25,000 paid directly to the contractor at closing and $35,000 to her. Does restructuring the payees change the outcome?
Read the worked answer
No. The limit applies to disbursements made to, or on behalf of, the borrower during the initial 12-month period, regardless of who receives the check. A payment to the contractor is still a disbursement for Rosa's benefit and counts dollar for dollar. Two checks to two payees are the same $60,000.
Beyond the math, the originator should not participate in structuring designed to make a prohibited draw 'look smaller' - that is a misrepresentation risk and would be indefensible in an examination or audit even if the contractor is legitimate.
What she can do: take the $24,000 now, apply it to the most time-sensitive obligation, and draw the remainder after the 12-month initial period from her remaining available principal limit, subject to her payment plan and the lender's draw procedures. If the renovation genuinely cannot wait, she needs another funding source or a smaller scope of work. Document that this option was explained.
3. Rosa asks what else could increase the amount she gets at closing. Evaluate the realistic options and rank them.
Read the worked answer
Options, in order of practicality:
- Reduce the cash need. The $12,000 personal loan is not a mandatory obligation, so it consumes the cap dollar for dollar. Paying it off from savings, or keeping it, frees the whole $24,000 for the renovation.
- Shift timing. Take the maximum now and draw the balance after month 12. This costs nothing but patience and is the cleanest solution.
- Reduce mandatory obligations. Compare lender fees and third-party costs; a lower-cost structure leaves more of the permitted disbursement as cash. Do not misstate or understate the payoff or omit the servicing set-aside.
- Re-examine the product. A fixed-rate HECM typically carries a higher expected rate and therefore a lower principal limit factor than an adjustable-rate option; switching structures might raise the principal limit, but it changes rate risk and payment options, so it must be presented as a trade-off, not a fix.
- A different loan program (for example, a proprietary reverse mortgage) may or may not be available in her state and requires its own disclosures - not a HECM answer.
There is no compliant way to exceed the cap at closing. Present the options neutrally and let her choose.