8198 / What are the consequences if a taxpayer receives disbursements from a reverse mortgage that exceed the new limitations that apply for 2013 and beyond?

There are situations where taxpayer could potentially receive reverse mortgage disbursements within the first 12 months that exceed the limitations imposed for loans issued on or after September 30, 2013. While the maximum disbursement that a taxpayer is generally entitled to receive from a reverse mortgage at the time the loan is closed, or within the first 12 months after closing, is now limited to 60 percent of the principal limit, the taxpayer may also elect to receive the sum of his or her mandatory obligations plus 10 percent of the principal limit (see Q Q 8197).¹

The borrower under a reverse mortgage may receive initial disbursements of more than 60 percent of the principal limit in several situations, including the following:

(1) the taxpayer’s mandatory obligations initially exceed 60 percent of the principal limit, or

(2) the taxpayer’s mandatory obligations exceed 50 percent of the principal limit and the taxpayer elects to receive the full additional 10 percent of his or her principal limit.