What Is a Proprietary Reverse Mortgage?
A proprietary reverse mortgage is a loan that allows senior homeowners to access the equity in their homes through a private lender. They are not as tightly regulated as home equity conversion mortgages (HECMs) and are not federally insured.
Proprietary reverse mortgages make up only a small segment of the market for reverse mortgages, and most of their customers are the owners of homes valued above the limit set by the Federal Housing Administration (FHA). For 2022, that limit is set at $970,800.
Understanding the Proprietary Reverse Mortgage
Proprietary reverse mortgages are sometimes called jumbo reverse mortgages because they are sought mostly by people who want access to more money than the federally insured reverse mortgage can supply and whose homes are valued at more than the limit the government sets.
In essence, they work the same way most HECM-insured reverse mortgages do. The homeowner gets a line of credit up to the assessed value of the home. They can take it as a lump sum, set up a monthly annuity for life, or choose a series of monthly payments for a number of years. It's the homeowner's choice. The amount withdrawn is repaid only when the homeowner or the homeowner's heirs sell the home.
Another variation on the reverse mortgage is the single-purpose reverse mortgage, which restricts the homeowner's withdrawals to payment of specific costs, typically property taxes and home repairs. Proprietary reverse mortgages, like most HECM-insured reverse mortgages, have no such restrictions.
Proprietary reverse mortgages vanished after the housing bubble burst in 2008, then re-emerged when home prices rebounded. They are still relatively rare because few lenders want to offer them. There isn't much of a secondary market for proprietary reverse mortgages, unlike the market that exists for more conventional mortgages. They are also more prone to scams than traditional forward mortgages because they are complex products specifically designed for retired individuals in need of cash with limited options of getting it.
Pros and Cons of a Proprietary Reverse Mortgage
Because they are not regulated, the lenders of proprietary reverse mortgages can establish their own terms outside of the restrictions set by the FHA.
- They may charge other or different fees than FHA-insured loans.
- They do not require that their customers take out mortgage insurance.
- Their customers are not required to attend a counseling session to make sure they understand the documents they are signing.
Lack of regulation can be a double-edged sword. Lenders may charge higher mortgage interest rates, additional fees, or both. They may also lend less relative to the home’s value to make up for the lack of mortgage insurance.
Proprietary reverse mortgages can have features that other reverse mortgages don’t, such as equity-sharing provisions, also called shared-appreciation provisions.
The proceeds of a proprietary reverse mortgage can go toward anything, including paying off the homeowner’s existing mortgage to free up monthly cash flow. Unlike HECMs, proprietary reverse mortgages do not restrict the amount a borrower can withdraw in the first year of the reverse mortgage term.
In every way, the proprietary reverse mortgage is the less-restrictive option.
Proprietary Reverse Mortgage vs. HECM
No mandatory counseling, no third-party guidance
Lending limit up to the lender
Can have higher fees
Mandatory counseling session
Lending limit of $970,800 (2022)
Generally lower fees
Which should you choose?
If you’re considering a proprietary reverse mortgage, you should compare interest rates and fees from several proprietary reverse mortgage lenders. Just as importantly, you should compare those quotes against several HECM quotes to see which option gives you the best deal. Also, consider alternatives like a home equity loan or a home equity line of credit (HELOC).
Two factors—your age and how much your home value exceeds the HECM limits—can help determine how good a deal this is for you.
The Bottom Line
Proprietary reverse mortgages are the only option for people needing a reverse mortgage above the federally backed HECM lending limit. For those who are under the limit, a proprietary reverse mortgage is a less-regulated option that may have higher fees than a HECM or single-purpose reverse mortgage. HECMs do have a mandatory counseling session that comes with a fee, while proprietary reverse mortgages do not. But remember: All reverse mortgages are complex financial instruments, and everyone should consider getting third-party counseling on the pros and cons before signing on for one.