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.
These may be contrasted with proprietary reverse mortgages and home equity conversion mortgages (HECMs).
- A reverse mortgage is a type of loan for seniors ages 62 and older that allows homeowners to convert some of their home equity into cash income.
- In a single-use reverse mortgage, borrowers must use these payments for a specific purpose that the lender approves.
- In particular, these lump-sum advances can help pay for property taxes, maintenance and upkeep of the home, home insurance premiums, or to cover common payments that fall within the lender’s interest.
- Other types of reverse mortgages are less restrictive but more costly; however, single-purpose loans are also harder to come by.
Understanding Single-Purpose Reverse Mortgages
A single-purpose reverse mortgage allows homeowners ages 62 and older the ability to turn existing home equity into a steady income stream in retirement. 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 because the lender bases the loan's payments on the borrower’s existing equity.
Single-purpose reverse mortgages limit the purposes for which borrowers can put the payments they receive to use. For example, lenders can insist that funds go toward the maintenance and upkeep of the home, or cover common payments that are in the lender’s interest, such as property taxes or homeowners 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. Because these purposes are intended to feed back into the home itself or its upkeep, it maintains the collateral for the lender, making these loans less costly than others that are general purpose.
Most single-purpose reverse mortgages are issued by government agencies and nonprofit organizations.
Reverse mortgages typically make the most sense for elderly borrowers who have paid off their homes 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 as income, which means they do not increase the borrower’s tax burden, nor do they usually affect eligibility for receipt of funds or services from Social Security or Medicare.
Other Types of Reverse Mortgages
The U.S. Department of Housing and Urban Development (HUD) insures the most common form of a reverse mortgage, home equity conversion mortgages (HECMs). Borrowers may use payments from these reverse mortgages for any purpose they wish. However, HUD maintains restrictions on the amount borrowers can receive via a home equity conversion mortgage. HUD requires borrowers to meet with a counselor employed by an independent housing counseling agency before applying for a home equity conversion mortgage.
For those with more expensive homes seeking to qualify for higher payments, some financial firms offer privately backed loans known as proprietary reverse mortgages. Borrowers looking for these reverse 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.
Mortgage lending discrimination is illegal. If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau or with the U.S. Department of Housing and Urban Development (HUD).
The Bottom Line
Single-purpose reverse mortgages have lower fees and better rates than the more common HECMs and proprietary reverse mortgages. They are given for a specific purpose, such as repairing a roof or paying property taxes, and they are generally issued only by nonprofit organizations or local government entities. If you are able to find one and get approved for one, they are a great option for getting the necessary funds to stay in your home in retirement.