Reverse Loans
Single-Purpose Reverse Mortgage
What Is A Single-Purpose Reverse Mortgage?
Single-purpose reverse mortgages allow homeowners aged 62 or older to borrow against their home equity to fund a single, lender-approved purpose, such as paying property taxes or performing maintenance on the home. Typically, this is the least expensive type of reverse mortgage to take out, largely because it’s backed by government agencies and non-profit organizations.
Single-Purpose Reverse Mortgage Vs. Other Types Of Reverse Mortgages
The most important thing to remember about a single-purpose reverse mortgage is included in its name. You can only use your proceeds for one thing – and it must be approved by your lender. This is one of the biggest differences between this type of reverse mortgage and the home equity conversion mortgage (HECM) and proprietary reverse mortgage, which both allow you to use your proceeds however you like.
The Pros And Cons Of A Single-Purpose Reverse Loan
A reverse mortgage isn’t for everyone. Before you apply, it’s important to weigh the pros and cons of this loan, especially while considering how you want to use it.
The Pros
The proceeds are tax-free. Because this money is a loan that will eventually be paid back, the proceeds from a single-purpose reverse mortgage are tax-free. These types of loans don’t usually affect Social Security or Medicare benefits, either, but it’s best to talk to a financial advisor to learn more.
It’s easier for some to qualify. Many people with a low or moderate income can qualify for these loans, while they may not qualify for the HECM or proprietary reverse mortgage.
No monthly payments are required. Reverse mortgages come due when the borrower sells the home, moves out of the home, passes away. It can also come due when the borrower fails to stay current on their property taxes or homeowners insurance or doesn’t maintain the home. As long as the loan doesn’t come due and you continue to pay your taxes and insurance and maintain the home, you’re not required to make a monthly payment on the loan. This can provide you more money each month for other expenses.
The Cons
Some fees are possible. While single-purpose reverse mortgages tend to be less expensive than other reverse mortgage loans, they may still come with fees, like closing costs. The lender will also charge interest on the loan.
There’s restricted use of proceeds. The biggest drawback of this type of reverse mortgage is that you can only use your proceeds for one purpose and the lender must approve it. That means you likely won’t be able to use it for living expenses, travel or medical costs. Typically, lenders approve these loans for such uses as paying property taxes or insurance premiums or making improvements to the home.
They’re not available everywhere. Single-purpose reverse mortgages aren’t offered in every state. They are typically offered by state and local governments or non-profit organizations along with some credit unions.
Alternative Loan Options
If you’re unable to get a single-purpose reverse mortgage in your state or want to explore other loan options, consider researching the HECM and proprietary reverse mortgages to see if they may be a better fit for your situation. You could also consider a home equity line of credit or home equity loan, which also allow you to borrow against the equity in your home.
The Bottom Line
A single-purpose reverse mortgage allows you to borrow from the equity in your home and use that money for a one purpose that must be approved by your lender. While they can be helpful for many seniors, including those with middle to low incomes, these loans aren’t available everywhere and may be too limiting for your goals. You may need to consider other reverse mortgage programs or home equity loans or look into refinance programs for seniors as well.
Home Equity Conversion Mortgage (HECM)
What Is a Home Equity Conversion Mortgage (HECM)?
A home equity conversion mortgage (HECM) is a type of reverse mortgage that is insured by the Federal Housing Administration (FHA). Home equity conversion mortgages allow seniors to convert the equity in their homes into cash.
The amount that may be borrowed is based on the appraised value of the home (and is subject to FHA limits). Borrowers must also be at least 62 years old. Money is advanced against the value of the equity in the home. Interest accrues on the outstanding loan balance, but no payments must be made until the home is sold, the borrower(s) dies, or the borrower(s) moves out of the property at which point the loan must be repaid entirely.
Key Takeaways
- Home equity conversion mortgages (HECMs) are reverse mortgages insured by the Federal Housing Administration (FHA).
- HECMs make up the majority of the reverse mortgage market.
- HECM terms are often better than those of proprietary reverse mortgages, but the maximum loan amount is limited, and mortgage insurance premiums are required.
How a Home Equity Conversion Mortgage Works
Home equity conversion mortgages are a popular type of reverse mortgage; in fact, they make up the bulk of the reverse mortgage market. Generally, reverse mortgage terms can vary with privately sponsored reverse mortgage products—officially known as proprietary reverse mortgages—potentially allowing for higher borrowing amounts with lower costs than HECMs.
HECMs, however, will typically offer lower interest rates for borrowers. The economics of a HECM—versus a privately sponsored reverse mortgage—will depend on the borrower’s age and how long the borrower expects to live in or own the home. Many types of reverse mortgages will exclusively target seniors with no requirements for repayment until the borrower sells their home or dies.
A HECM can also be considered in comparison to a home equity loan. A home equity loan is not dissimilar to a reverse mortgage, since borrowers are issued a cash advance based on the equity value of their home, which acts as collateral. However, with a home equity loan, the funds have to be paid back, usually in steady monthly interest payments shortly after the funds are disbursed.
Federal Trade Commission. “Home Equity Loans and Home Equity Lines of Credit.”
While HECM loans do not require borrowers to make monthly payments, certain fees are associated with the closing and servicing of the loan. Borrowers also have to pay mortgage insurance premiums. Although these premiums and fees can be rolled into the loan, this lowers the amount of equity a borrower can tap, referred to as the net principal limit.
Who Is Eligible for a Home Equity Conversion Mortgage (HECM)?
The Federal Housing Administration sponsors the home equity conversion mortgage and provides insurance on the products. The FHA also sets the guidelines and eligibility for these loans. Borrowers can only obtain HECMs from banks where the FHA sponsors the product.1 To obtain a home equity conversion mortgage, a borrower must complete a standard application.
To obtain approval, a borrower must meet all of the requirements set by the FHA. They must:
- Be at least 62 years old
- Own the property or have paid down a considerable amount
- Use the property as their principal residence
- Not be delinquent on any federal debt
- Have the financial capability to continue to make timely payments of ongoing property charges such as property taxes, insurance, homeowner association fees, etc.
- Participate in a consumer information session provided by a Housing and Urban Development-approved HECM counselor2
U.S. Department of Housing and Urban Development. “How the HECM Program Works.”
In addition, the property must be one of the following:
- A single-family home or two- to four-unit home with one unit occupied by the borrower
- A HUD- or FHA-approved condominium
- A manufactured home that meets FHA requirements
What Is the Difference Between a HECM and a Reverse Mortgage?
All HECMs are reverse mortgages, but not all reverse mortgages are HECMs. HECMs are reverse mortgages backed by the FHA and issued by an FHA-approved lender.
Can You Lose Your Home with a HECM?
Yes, you can lose your home several ways with a HECM reverse mortgage. If you fail to keep the property in good repair or pay property taxes and insurance, your HECM balance becomes due. If the property stops being your primary residence for more than 12 consecutive months, the balance becomes due. Even if you leave your home involuntarily because of a lengthy stay in a hospital, nursing home, or assisted living facility, you could lose your home if you can’t afford to pay the balance on your reverse mortgage.
Are HECMs Expensive?
Yes, HECMs carry very high origination, mortgage insurance premiums, and maintenance fees.
What Are Good Alternatives to an HECM?
There are several good alternatives to an HECM depending on your situation. If you can qualify for a single-purpose reverse mortgage through a local nonprofit, those are usually much cheaper. If you can downsize your home, you may not need the extra income from a HECM and will then be able to pass on your home to your heirs or leave it to the charity of your choice when you pass.
The Bottom Line
A home equity conversion mortgage (HECM) is the most common type of reverse mortgage. It allows older borrowers to tap the equity in their homes without having to pay it back until they pass or move. If borrowers don’t need to borrow above the HUD limits for a proprietary reverse mortgage, and they don’t qualify for a single-purpose reverse mortgage through a local nonprofit or government entity, then the HECM is their most logical choice.
Proprietary Reverse Mortgages
Proprietary Reverse Mortgages Vs. HECMs
Unlike the proprietary reverse mortgage, the HECM is a government-insured reverse mortgage. Like the proprietary reverse mortgage, the HECM allows you to borrow against the equity in your home. What makes the HECM different is that it’s insured by the FHA, which means it has loan limits and some additional guidelines in place to protect borrowers.
The HECM loan limit, or maximum claim amount, for 2022 is $970,800. That means the highest home value that can be used to calculate your reverse mortgage proceeds is $970,800. If your home value is $1,000,000, the amount of money you’ll receive from a HECM will be determined using a value of $970,800 – limiting the amount you could actually get. With a proprietary reverse mortgage, the full $1,000,000 value of the home could be used, providing access to more equity. Keep in mind that home value is just one factor in determining how much you can borrow. The other factors will depend on your lender.
The HECM also requires borrowers to go through reverse mortgage counseling and a financial assessment. The counseling session ensures the borrower understands the financial obligations of the loan and any alternative options they may have. The financial assessment ensures the borrower is able to uphold those loan obligations, such as continuing to pay their property taxes and homeowners insurance.
Of course, since both are reverse mortgages, both the HECM and proprietary reverse mortgage have similarities, too. For example, the proceeds from both loans can be used for anything. And, they are also more expensive than traditional home loans.
Reverse mortgages, no matter the type, can be helpful financial tools in retirement, but they’re not for everyone. If you’re unsure which reverse mortgage, if any, is right for you we recommend speaking to a financial advisor.
Who Can Benefit From A Proprietary Reverse Mortgage?
To qualify for this type of loan, you must be 62 or older, have enough equity in the home and use the home as a primary residence. You can own your home free and clear or have an existing mortgage.
A proprietary reverse mortgage may be a better fit for some borrowers than others. These could be homeowners with a primary residence valued over $970,800, who want to get the most proceeds possible or those who just want to avoid paying FHA insurance and counseling fees.
You should still research all of your options, including other reverse mortgages and alternative loan options, and shop around for the best loan terms.
How Do Proprietary Reverse Mortgages Work?
With a proprietary reverse mortgage, your proceeds come from your home’s equity. The loan first pays off your current mortgage. Then, any remaining proceeds are provided in a lump sum that you can use for anything and are nontaxable. You must continue to pay your property taxes and homeowners insurance and maintain your home and your name stays on the title of the home.
Because they’re not federally insured, most proprietary reverse mortgages don’t require upfront mortgage insurance or monthly mortgage insurance premiums. However, they often come with higher interest rates.
The Pros And Cons Of Proprietary Reverse Mortgages
A proprietary reverse mortgage can be riskier than a HECM or a traditional home loan, so it’s important to consider the pros and cons of this type of loan.
The Pros Of Proprietary Reverse Mortgages
- Larger loan amounts: Because the loan doesn’t have to conform to loan limits set by the FHA, you can receive larger loan amounts with proprietary reverse mortgages than with other types of reverse mortgages.
- Unlimited uses for funds: The proceeds from a proprietary reverse mortgage can be used for anything. That includes paying for home renovations, living expenses, travel and more. The only type of reverse mortgage that limits how you can use your funds is the single-purpose reverse mortgage.
- No upfront mortgage insurance: Since these loans aren’t federally insured, you won’t pay upfront mortgage insurance fees. The upfront mortgage insurance fee for a HECM is typically about 2% of your home’s value. Not having to pay that fee on a $500,000 home could save you $10,000.
- No monthly mortgage payments: This type of loan pays off your existing mortgage and you’re not required to make payments on the reverse mortgage until the loan comes due. However, you must still pay your property taxes and homeowners insurance.
The Cons Of Proprietary Reverse Mortgages
- May not offer disbursement options: Most lenders only offer the proceeds in a lump sum payment. With a HECM, you can receive funds in a lump sum payment, monthly distributions, a line of credit or any combination of the three.
- High interest rates: Because proprietary loans can be riskier for the lender, interest rates for these loans can go as high as 6%. Currently, interest rates for the HECM are up to about 4%.
- Fewer protections: The government put certain guidelines in place for the HECM in order to ensure borrowers were aware of their options, understood their responsibilities and were in a good financial position to be successful with their loans. Without these features, it’s up to the borrower to make an educated decision based on their financial situation and all of the options available to them.
Should I Apply For A Proprietary Reverse Mortgage?
If you’re thinking of applying for a proprietary reverse mortgage, keep in mind these general reverse mortgage requirements:
- You must be at least 62 years old.
- You must have enough equity in your home to qualify.
- The home must be your primary residence.
- You must be able to continue paying property taxes and homeowners insurance.
Speaking to a financial advisor about your options may be helpful, too.
Shop around to find the lender with the best interest rates and lowest fees. Since these are private loans, the lender has more say in qualification requirements, loan terms and how much it’s able to lend.
You should also see if a home equity line of credit or a home equity loan makes more sense for your finances and your goals.
FAQs About Proprietary Reverse Mortgages
Still trying to decide if a proprietary reverse mortgage is a good choice for you? Here are a few most frequently asked questions.
Are reverse mortgages a good way to increase retirement income?
They can be. When you take out a reverse mortgage, you’ll receive regular payments from the lender, increasing your cash flow each month. However, you’ll lose out on the equity in your home and, when you sell the house, the lender will take what they’re owed from the sale price.
Can anyone apply for a proprietary reverse mortgage?
Proprietary reverse mortgages are meant for seniors and those nearing retirement age. You’ll need to be at least 62 years of age to apply and qualify for a reverse mortgage.
Are there any use restrictions for the money from reverse mortgages?
No. You’re free to use the funds however you see fit. That means you can use the reverse mortgage to cover medical costs, home improvements, paying off other debts, supplementing your income or anything else you need help paying for.
Can I take out a reverse mortgage if I have an existing mortgage on my home?
Yes, and most seniors using reverse mortgages still owe money on their homes. You’ll be able to use the reverse mortgage to pay off your original mortgage and use any money left to cover your living expenses each month.
The Bottom Line
A proprietary reverse mortgage is one of three types of reverse mortgage loans. It allows you to access the equity in your home and use the money for anything you like. Because it’s not government-insured, you may be able to get more proceeds than from other reverse mortgages and you don’t have to pay an upfront mortgage fee. However, interest rates may be higher and more risk may be involved. It’s important to educate yourself on this type of loan and weigh its benefits and drawbacks.
If you’re looking for ways to supplement your retirement income or fund a home project, consider other refinancing options