What is a Single-Purpose Reverse Mortgage
A single-purpose reverse mortgage is an agreement through which lenders make payments to borrowers in exchange for a portion of the borrower’s home equity. Borrowers must use these payments for a specific purpose approved by the lender.
BREAKING DOWN Single-Purpose Reverse Mortgage
A single-purpose reverse mortgage allows a homeowner a chance to turn existing home equity into a steady income stream. As with any reverse mortgage, lenders make payments to borrowers as an advance on their home equity. In most cases, lenders expect repayment when the borrower moves out of the home or passes away, at which point the sale of the home would theoretically cover the loan repayment, since the lender bases the loan's payments on the borrower’s existing equity.
Reverse mortgages typically make the most sense for elderly borrowers who have paid off their home and need a consistent income stream. Homeowners retain the title to their home when they take out a reverse mortgage. Because payments represent an advance on equity, government agencies do not consider them income, which means they do not increase the borrower’s tax burden, nor do they usually affect eligibility for receipt of funds from Social Security or Medicare.
Single-purpose reverse mortgages limit the uses to which borrowers can put the payments they receive. For example, lenders may insist that funds be used for maintenance and upkeep of the home, or to cover common payments that fall under the lender’s interest, such as property taxes or homeowner’s insurance. Because of this, borrowers typically find them easier to obtain and at lower interest rates than other types of reverse mortgages. On the other hand, borrowers may find it challenging to locate lenders who offer these types of loans. Most single-purpose reverse mortgages get issued by government agencies and non-profit organizations.
Other Types of Reverse Mortgages
The U.S. Department of Housing and Urban Development (HUD) insures the most common form of reverse mortgage, home equity conversion mortgages. Borrowers may use payments from these reverse mortgages for any purpose they wish. HUD maintains restrictions on the amount borrowers can receive via a home equity conversion mortgage, however. For those with more expensive homes seeking to qualify for higher payments, some financial firms offer privately backed loans known as proprietary reverse mortgages.
HUD requires borrowers to meet with a counselor employed by an independent housing counseling agency before applying for a home equity conversion mortgage. Borrowers looking for other types of mortgages can avoid the fee involved with meeting a counselor by going directly to lenders, but the Federal Trade Commission (FTC) warns consumers who do so to shop carefully, compare different advice from different lenders and be wary of high-pressure sales pitches or hidden fees.