Older property owners keen to turn their home equity into cash often find that a traditional, government-backed home equity conversion mortgage (HECM) can satisfy their needs. However, these federally backed reverse mortgages aren’t for everyone. Plenty of Americans either don’t fit the lending criteria of the U.S. Department of Housing and Urban Development (HUD) or require a bigger payout, prompting them to look at alternate solutions, including privately funded jumbo reverse mortgages.
- Jumbo reverse mortgages have improved over the years as demand rose and more competitors entered the market.
- These loans cater to the property-rich, cash-poor portion of the population who need more funds than a government-backed home equity conversion mortgage (HECM) can offer.
- They can also appeal to homeowners having difficulty qualifying for a HECM, perhaps because they are too young or their property is not approved for loans by the Federal Housing Administration (FHA).
- The additional flexibility these loans offer does come with some caveats, including potentially higher interest rates, fewer protections, and limited payment options.
What Is a Jumbo Reverse Mortgage?
Jumbo reverse mortgages, which are formally known as “proprietary reverse mortgages,” are structured and insured by private companies. This means they generally offer greater flexibility in terms of eligibility requirements and borrowing limits, among other things, than HECMs, which are the most common type of reverse mortgage.
HECMs are government-backed reverse mortgages offered by lenders approved by the Federal Housing Administration (FHA). They allow homeowners who are at least 62 years old to borrow their home’s current value minus any liens and not pay the money back until they sell the home, move out, or die. They can receive their funds as a lump sum, a series of regular monthly payments, or a line of credit.
Jumbo reverse mortgages essentially function in the same way, but they carry fewer restrictions because they are private vehicles. This can result in more-generous loans and accessibility, but also fewer protections and a greater risk of being left in a worse position come repayment day than with a HECM. Still, tales of this market being wilder than the Wild West are a bit wide of the mark. Jumbo reverse mortgages aren’t as bad as some people make out.
HUD’s tightening of rules to prevent HECMs from continually losing money raised demand for alternative solutions and increased the number of companies offering jumbo reverse mortgages. This extra competition has resulted in more-competitive terms, turning these somewhat controversial loans into a worthy solution for a fairly sizable portion of the population that isn't served by government-backed HECMs.
To Whom Do Jumbo Reverse Mortgages Cater?
Jumbo reverse mortgages are principally designed to meet the needs of either people with lots of equity tied up in properties who require more cash than a traditional reverse mortgage can offer or those who simply want to tap into their home equity but don’t meet HUD’s somewhat rigid conditions.
People Who Are Property Rich, but Cash Poor
Proprietary reverse mortgages were nicknamed “jumbo” because they are associated with high-dollar-value homes and bigger loans.
The national lending limit on HECMs has been rising and, in 2022, sits at $970,800. That’s comfortably above the average home value in America and should fit most needs. However, not many people stand a chance of getting anywhere near that amount, even if they have at least that much equity tied up in their home. Individuals with ownership stakes in property surpassing $1 million in value could feasibly get a bigger cash injection with a jumbo reverse mortgage.
A lot depends on how much money is required. People often seek out reverse mortgages to finance a decent retirement and perhaps make up for any pension shortfalls. Alternatively, they may need to pay medical expenses, remodel homes to meet changing health and age needs, or service debts. Sometimes a HECM can’t cover those needs, and a jumbo reverse mortgage is the only alternative.
The loan proceeds from a jumbo reverse mortgage can be used however you wish.
People Who Can’t Qualify for a HECM
Another key reason why homeowners may shop for a jumbo reverse mortgage is because they have difficulty qualifying for a HECM. Having government backing means that HECMs come with more restrictions. For example, the age limit for HECMs is 62, whereas some jumbos will accept applicants as young as 55.
Another barrier that HECMs impose is on property types. HUD will only sanction these loans on homes that have been approved by the FHA. There is much more leniency with jumbos.
Disadvantages of Jumbo Reverse Mortgages
Jumbo reverse mortgages shouldn’t be entirely dismissed, as they play an important role in serving a portion of the public whose needs aren’t covered by HECMs or other types of loans. More choice in the market is usually a good thing. However, jumbo reverse mortgages aren’t without flaws. Some of the biggest drawbacks of these private programs as compared with HECMs include:
- Higher borrowing costs – Interest rates on jumbo reverse mortgages tend to be higher, because larger amounts are being borrowed over potentially longer time frames and the lender is on the hook should property prices plummet.
- Potentially fewer protections – Lenders aren’t obligated to throw in the type of protections offered with HECMs, such as younger spouse protection and the non-recourse feature, even though some of them do.
- Less-flexible payment options – A HECM lets you choose from several payment options, including a lump-sum payment, a line of credit, or regular monthly income for as long as you live in your home. Jumbo reverse mortgage lenders aren’t always as accommodating.
What Are the Different Types of Reverse Mortgages?
There are basically three types of reverse mortgages. The most well known is the HECM. The others are jumbo reverse mortgages and single-purpose reverse mortgages.
How Much Can I Borrow With a Jumbo Reverse Mortgage?
The maximum sum available is $4 million, although getting that much will be difficult even if you have that much or more of your own capital tied up in your home.
How Do You Pay Back a Reverse Mortgage?
There are essentially three ways to repay a reverse mortgage:
- Sell the property and use the proceeds to settle the loan.
- Pay the debt with other money and keep the property.
- Sign a deed in lieu of foreclosure, which gives the lender permission to sell the house and collect the funds on your behalf.
The Bottom Line
Jumbo reverse mortgages serve an important purpose, are increasingly becoming more competitive, and sometimes may be the most cost-effective or only way to meet your cash needs.
However, when taking this route, make sure you prudently weigh each proposal, read all the fine print before signing on the dotted line, and shop around to get the best deal possible. While failing to be picky might still result in a decent cash inflow, it could eventually wipe out the assets you amassed for your heirs.