A home equity conversion mortgage (HECM) may seem like the best option for many considering a reverse mortgage. But for homeowners with a high-value home or who need a lump sum for a specific purpose, there are two other options: proprietary reverse mortgages and single-purpose reverse mortgages.
- Proprietary reverse mortgages are not insured and have few regulations.
- Proprietary reverse mortgages can be obtained for larger amounts than home equity conversion mortgages (HECMs).
- Single-purpose reverse mortgages are overseen by governments and nonprofits, generally for economically disadvantaged seniors.
How a Reverse Mortgage Works
A reverse mortgage is when a homeowner borrows against the equity in their home. Only available to adults age 62 or older, reverse mortgages are often used to provide liquid cash flow to offset living expenses, make home modifications, or pay for healthcare costs.
Reverse mortgages are similar to a home equity line of credit: The funds are paid directly to the homeowner. In a reverse mortgage, the lending institution pays the homeowner with the expectation that the loan will be paid off when the owner dies or moves, using the home’s sale to repay the debt.
Proprietary Reverse Mortgages
As mentioned above, HECMs comprise the bulk of the reverse mortgage market. With insurance from the Federal Housing Administration (FHA), HECMs tend to have lower rates than proprietary reverse mortgages. They also come with more limits, including an upper limit on how much money you can borrow. For 2022, homes cannot exceed $970,800 in HECMs.
With housing values and sales prices on the rise in recent years, many homes—especially in high cost-of-living areas—easily top that amount. A proprietary reverse mortgage may be your best bet for seniors in those homes.
Proprietary reverse mortgages work the same way that HECMs do: The house is appraised, and borrowers choose how much money they want to borrow and how they want to receive it. They can receive a lump sum, monthly payments, a line of credit, or a combination of two ways.
Proprietary reverse mortgages have a few things missing, though—namely, regulations.
Proprietary reverse mortgages are not insured by the FHA and carry few regulations. All HECM borrowers must undergo mortgage counseling before taking a loan, but this is not required for a proprietary reverse mortgage. Proprietary reverse mortgages are also not subject to mortgage insurance premiums, saving borrowers roughly 2% of the initial loan cost and 0.5% annually.
Since private lenders offer proprietary reverse mortgages, there are no limits on how much a homeowner can borrow. They may have higher fees for the same reason, since there are no regulations. If a proprietary reverse mortgage seems like your best option, shop around for the best interest rate and read the fine print, as fees can eat into your payout.
Check your local city and state government for single-purpose reverse mortgages. Typical uses include paying for property taxes, home repairs, or upgrading the home to age in place.
Single-Purpose Reverse Mortgages
Whereas proprietary reverse mortgages remove most restrictions, single-purpose reverse mortgages add them. These reverse mortgages are typically issued by state and local governments or nonprofits, not private lenders.
Single-purpose reverse mortgages offer lower fees than proprietary reverse mortgages or HECMs, but they also come with stipulations on how you can spend your money. Rather than using the borrowed equity to pay for everyday living expenses, single-purpose reverse mortgages are typically designed to pay for something specific, such as home repairs or property taxes.
Because they are designed to help seniors pay for an essential cost, there are also typically income limits on single-purpose reverse mortgages. Every state or local government may have different stipulations for acceptance, and many programs forgive the loan if all stipulations are met.
For example, Missouri offers a Home Repair Opportunity (HeRO) program. Funds not only have to go toward home repairs, but homeowners also must have an income below 80% of the area median. They also must live in the home for at least three years after the repairs are completed, at which point the loan is forgiven.
In California, the Property Tax Postponement Program functions similarly to an HECM. Homeowners must be at least 62 years old with 40% equity in their homes and a household income of $45,810 or less. Individuals with a disability may also qualify. If they meet the requirements, property tax for the year when they apply will be deferred at a low interest rate. The loan plus interest is then paid when the property is sold or is used as equity in a different type of reverse mortgage.
Are there income requirements for a proprietary reverse mortgage?
No. Since every proprietary reverse mortgage goes by the lenders’ stipulations, there’s no standardized income requirement for a proprietary reverse mortgage. Most people seeking a proprietary reverse mortgage have homes with a high value or need to borrow a greater percentage of their home’s equity than is allowed by the Federal Housing Administration (FHA).
Do all states offer single-purpose reverse mortgages?
Single-purpose reverse mortgages are less common than home equity conversion mortgages (HECMs) or proprietary reverse mortgages. State governments offer some programs, but others are on the county or city level. Inquire in your area to see if there are programs that might help.
Are proprietary reverse mortgages cheaper than HECMs?
The answer depends on your situation. While proprietary reverse mortgages don’t require mandatory credit counseling or mortgage insurance premiums, they typically charge higher interest rates. Service fees also may be higher, with no regulations capping fees. Read the fine print on your proprietary reverse mortgage to see exactly what you’re paying for.
The Bottom Line
HECMs are the most common form of reverse mortgages, but they don’t fit every situation. Proprietary and single-purpose reverse mortgages tend to be more appropriate for those on either end of the spectrum—those who are house rich and cash poor, or those living under the median income level for their area. Beware of scams involving proprietary reverse mortgages, because the safeguards inherent in HECMs, such as mortgage counseling, are not required.