What Is the 60% Rule on a Reverse Mortgage? Complete 2026 Guide

The 60% rule is one of the most commonly misunderstood aspects of the HECM reverse mortgage program — and one that affects what borrowers can do at closing and in the first year of their loan. Many clients arrive for consultation not knowing the rule exists. Others know it exists but believe it is more restrictive than it actually is. This guide explains exactly how it works, when it applies, when exceptions apply, and what it means in practical terms for California and Arizona homeowners.

Why the 60% Rule Exists

Before 2013, HECM borrowers could take out 100% of their approved principal limit as a single lump sum at closing. According to NOLO's 2026 analysis of HECM regulations, this led to many defaults in the following years because borrowers had used up all the equity in their home and couldn't get more money or another loan when they needed it.

The 60% rule was implemented as part of the Reverse Mortgage Stabilization Act and took effect in September 2013. It is a federal consumer protection — implemented by HUD through FHA — designed to ensure that borrowers do not exhaust all available equity in the first year of the loan and have resources remaining for later in retirement when they may need them most.

The Congressional Research Service confirmed in its official analysis of the HECM program that the initial disbursement limit is currently the greater of 60% of the principal limit or any mandatory obligations plus 10%. The FHA Commissioner has authority to adjust these percentages, but they cannot drop below 50% or 10% respectively under the 2017 HECM regulations.

How the 60% Rule Works: The Exact Mechanics

What is the principal limit?

The principal limit is the total amount HUD approves for your HECM loan based on your age, your home's appraised value, and current interest rates. It is the 'pool' of available equity from which all draws are made throughout the life of the loan. The 60% rule applies to this principal limit — not to your home's value.

Example: A 70-year-old San Diego homeowner with a $900,000 home qualifies for a principal limit of approximately $414,000 based on May 2026 rates. The 60% rule limits first-year access to $248,400 (60% of $414,000). The remaining $165,600 becomes available on day 366 — plus any line of credit growth that has accumulated on the unused portion during year one.

What counts toward the 60% limit

Any draw during the first 12 months counts against the 60% limit — whether at closing or during the first year. This includes:

• Lump sum draws at closing
• Line of credit draws taken in months 1 through 12
• Monthly tenure or term payments received in year one
• Closing costs financed into the loan (they count against the limit)
• The LESA set-aside if one is established at closing

What does NOT count toward the 60% limit

Mandatory obligations: Existing mortgage payoffs, liens, and financed closing costs are classified as mandatory obligations and are excluded from the 60% first-year cap. If you must pay off an existing mortgage at closing, that payoff is funded regardless of the 60% threshold.

The remaining 40%: On day 366 the remaining principal limit becomes fully available with no restriction. If you have a line of credit it grows throughout year one on the unused balance and is larger on day 366 than it was at closing.

The Mandatory Obligations Exception: When More Than 60% Is Allowed

The most practically important aspect of the 60% rule is the exception for mandatory obligations. According to All Reverse Mortgage's 2026 explanation of the 60% rule, when an existing mortgage and lien payoffs exceed the 60% threshold, borrowers can access the mandatory obligations amount plus an additional 10% of the principal limit above that.

Here is the exact formula from the Congressional Research Service analysis:

Real Scenarios: How It Plays Out for California and Arizona Homeowners

The following table shows how the 60% rule works across the most common scenarios Jay encounters in his California and Arizona practice, using a $400,000 principal limit for consistent illustration:

How the 60% Rule Affects Your Mortgage Insurance Premium

The 60% rule is directly connected to the upfront FHA mortgage insurance premium (MIP) you pay at closing. According to the Congressional Research Service's analysis of HECM program regulations, the upfront MIP rate is determined by whether first-year disbursements stay at or below 60% of the principal limit:

The MIP difference is significant. On a $400,000 principal limit the difference between the 0.5% and 2.5% tier is $8,000 — from $2,000 to $10,000. For a free-and-clear California homeowner who does not need to pay off an existing mortgage, staying at or below 60% in year one qualifies for the lower MIP rate. This is a meaningful financial benefit of conservative early borrowing.

For borrowers with existing mortgages that exceed 60% of the principal limit, the higher 2.5% MIP is unavoidable — the mandatory obligation exception requires drawing above the threshold to pay off the mortgage. The MIP is simply a cost of the transaction in those cases.

The 60% Rule and the Fixed-Rate HECM

The 60% rule interacts differently with the fixed-rate HECM than with the adjustable-rate HECM. On the fixed-rate product, the borrower must take the entire principal limit as a lump sum at closing — there is no line of credit option on the fixed rate. This means:

• The full principal limit is disbursed at closing
• But only 60% can be taken as cash — the remaining 40% is not accessible
• The upfront MIP on a fixed-rate HECM is always 2.5% because the disbursement structure implicitly exceeds 60%
• The 40% that 'stays in the loan' reduces the effective loan amount but still accrues interest

This is one of the primary reasons the fixed-rate HECM is less efficient than the adjustable-rate product for most borrowers who do not have a mandatory obligation that consumes most or all of the principal limit. On the adjustable rate, the unused portion of the line of credit grows over time and is accessible. On the fixed rate, the inaccessible 40% simply costs the borrower MIP and interest without providing usable funds.

For the full comparison: Fixed vs Adjustable Rate Reverse Mortgage.

What Happens After Year One

On day 366 — the first day of year two — the 60% restriction completely lifts. The borrower has access to the full remaining principal limit, which includes:

• The original 40% that was restricted in year one
• Any line of credit growth that accumulated on unused portions throughout year one
• Any portions of the year-one 60% that were not drawn

Example: A free-and-clear San Diego homeowner with a $400,000 principal limit draws $100,000 at closing. During year one she draws no additional funds. On day 366 her available balance is $300,000 (the remaining principal limit) PLUS line of credit growth on the unused $300,000 at approximately 7% — approximately $21,000 in growth — for a total of roughly $321,000 available on day 366.

There is no action required on day 366. The restriction lifts automatically and the full remaining balance becomes available without any additional documentation, counseling, or application. The servicer monitors draws throughout year one and simply stops applying the limit when the 12-month period ends.

Strategic Implications: How to Think About the 60% Rule

Understanding the 60% rule changes how sophisticated borrowers structure their first-year draws. Here is how Jay thinks about it with clients:

For free-and-clear homeowners

The lower 0.5% MIP is a strong incentive to keep year-one draws at or below 60%. For a homeowner who does not have an immediate need for the full 60%, drawing conservatively at closing — taking only what is needed now — produces a larger growing line of credit. The unused portion grows from day one, compounding monthly. Drawing less in year one means more available in year two.

For homeowners with existing mortgages

The mandatory obligation calculation determines everything. If the existing mortgage exceeds 60% of the principal limit, the 2.5% MIP applies regardless of how much additional cash is taken. In those cases the economic decision is whether the mortgage payoff benefit — eliminating the monthly payment permanently — justifies the higher MIP. In most cases it does, significantly.

Timing of optional draws

If a borrower plans to take a significant optional draw in the near future — a home improvement project, a healthcare expense, a specific one-time need — the timing relative to day 366 can matter. A draw taken at closing is subject to the 60% limit. A draw taken on day 366 is not. Waiting 12 months for a large discretionary draw preserves the lower MIP tier and takes advantage of line of credit growth on the unused balance during the wait.

Frequently asked questions

Does the 60% rule apply to the fixed-rate HECM?

Yes, but in a way that effectively makes it always exceed 60%. On the fixed-rate HECM the borrower must take the entire principal limit as a lump sum at closing. Only 60% of the principal limit is accessible as cash — the other 40% is not disbursed. The upfront MIP on fixed-rate HECMs is always 2.5%. The adjustable-rate HECM's line of credit option allows more efficient use of the 60% threshold by drawing only what is needed.

What is the exact date year two begins?

The 12-month restriction period begins on the first payment date of the loan — typically the first day of the month following the month of closing. The restriction lifts at the beginning of month 13. For example, a loan that closes on September 15 and has a first payment date of October 1 would have the 60% restriction lift on October 1 of the following year. Your servicer tracks this date and will notify you when the restriction lifts or simply allow the draw when you request it on or after day 366.

Can you access more than 60% in year one if you really need to?

For discretionary draws: no. The 60% limit is hard for optional draws and the servicer will not process a draw request that exceeds it during year one. For mandatory obligations: yes — the exception applies automatically and the servicer calculates the mandatory obligation amount when the loan is underwritten. The additional 10% above mandatory obligations can be drawn in year one as well, up to the calculated threshold.

Does the 60% rule affect my line of credit in year two?

No. After the 12-month period ends all remaining principal limit is available without restriction. The line of credit in year two includes: the original restricted 40%, any portion of the year-one 60% that was not drawn, and all line of credit growth accumulated on the unused balance during year one. The year-two balance is typically larger than the year-one restricted balance due to the growth feature.

Is there a 60% rule for HECM for Purchase?

The HECM for Purchase program structures differently from a standard HECM. At closing the reverse mortgage proceeds cover the difference between the purchase price and the buyer's down payment. Because the full principal limit is typically deployed to fund the purchase in a single transaction, the 60% restriction works differently — the purchase itself is treated as a mandatory obligation. Jay explains the specific application of the 60% rule for each HECM for Purchase client during the pre-qualification process.

The bottom line

The 60% rule is a HUD consumer protection that limits first-year HECM draws to 60% of the approved principal limit, with the remaining amount available in year two. The rule was implemented in 2013 after the unrestricted access to 100% of principal at closing led to defaults and equity depletion among borrowers who needed funds later in retirement.

For most California and Arizona homeowners the 60% rule is not a significant constraint — it is a structure that actually works in the borrower's favor by encouraging conservative early draws, qualifying them for the lower 0.5% MIP tier, and preserving the line of credit growth feature on a larger unused balance. Understanding it precisely allows borrowers to structure their first-year draws strategically.

Related reading: How Much Can You Get From a Reverse Mortgage? · Reverse Mortgage Line of Credit Growth · Reverse Mortgage Interest Rates 2026

This material is not from HUD or FHA and has not been approved by HUD or any government agency. All reverse mortgage loans are subject to credit and property approval. Scenarios shown use approximate principal limit figures for illustration only. Actual amounts require personalized calculation. This content is for educational purposes only and does not constitute financial or legal advice. CA DRE #01456165, #01450361 · NMLS #307713 · AZ #1022722.