HECMs, Proprietary Reverse Mortgages, and Single-Purpose Reverse Mortgages Provide Borrowers With Many Options
When it comes to getting a reverse mortgage, borrowers have a variety of options at their disposal. These include single-purpose reverse mortgages, proprietary reverse mortgages, and HECMs. FHA-insured HECMs are the most common type of reverse mortgage, and, while they’re offered by private lenders, they still must follow a variety of rules set by the FHA. Single-purpose reverse mortgages can only be used for one, pre-approved purpose, such as paying property taxes or necessary home renovations, and are offered by state and local government agencies and certain non-profits. In contrast, proprietary reverse mortgages are offered by private lenders, and are often used by homeowners with home values far above the FHA lending limit.
HECMs Are The Best Option For The Average Homeowner
Home Equity Conversion Mortgages, or HECMs, are reverse mortgages insured by the Federal Housing Administration (FHA). Loan limits for HECMs are established by the federal government and are updated on a regular basis. Right now, the HECM lending limit is $679,650, however, many believe that this will increase to around $720,000 at some point in 2019. HECMs also require that the loan first be used to pay off any existing loan balance, which is not usually a requirement of other types of reverse mortgages. This means that borrowers will typically need to have at least 50% equity in their home in order to make an HECM a worthwhile proposition.
In addition, HECMs provide a variety of protections for borrowers, including protections for non-borrowing spouses that allow them to live in their home after their borrowing spouse dies. However, HECMs do have certain drawbacks, including the fact that borrowers will have to pay bot an annual and upfront mortgage insurance premium (MIP), as well as certain other FHA fees.
Proprietary Reverse Mortgages Provide Options for Borrowers With Expensive Homes
While HECMs dominate most of the reverse mortgage market, about 10% of reverse mortgages issued are actually proprietary reverse mortgages. This means that they are not insured or tightly regulated by the federal government. Therefore, they lack many of the borrower protections of FHA-insured Home Equity Conversion Mortgages, such as protections for non-borrowing spouses. In addition, while most proprietary reverse mortgages (like HECMs) are non-recourse, borrowers should not assume that this is always the case. These reverse mortgages also usually come with higher interest rates than HECM loans. On the upside, however, proprietary reverse mortgages do not require mortgage insurance premiums, or any other form of mortgage insurance.
Proprietary reverse mortgages, particularly jumbo reverse mortgages, are common among borrowers with high-value homes. Jumbo reverse mortgages are typically available for borrowers with homes worth between $1 million to $6 million, though recent changes in the market may allow those with homes valued at as little as $850,000 to apply. In most cases, jumbo reverse mortgage payouts top out at $3 million. Currently, only two companies offer jumbo reverse mortgages in the United States: American Advisors Group (AAG), and Finance of America Reverse. While jumbo reverse mortgages may offer borrowers significantly more funds (as long as they have an expensive enough home), borrowers will also usually have to jump through a lot of hoops to get one. Because lenders are providing borrowers larger payouts, they want a lot of evidence that a borrower will be able to repay the loan. This includes FICO scores, financial statements, and other documentation.
Single-Purpose Reverse Mortgages Can Help Borrowers With Specific Financial Needs
While they’re not particularly common, single-purpose reverse mortgages can still help fulfill the financial needs of borrowers with certain, specific needs. Unlike both HECM loans and proprietary reverse mortgages, which are provided by private lenders, single-purpose reverse mortgages are provided by state and local agencies, as well as certain non-profits. Single-purpose reverse mortgages are, as the name suggests, designed only for a single purpose. This purpose can vary, but is usually either for paying off property taxes, or for funding necessary home repairs.
Certain Rules Apply To All Three Kinds Of Reverse Mortgages
While all three types of reverse mortgages have slightly different rules and uses, they also have a few things in common. For example, in order to qualify for a reverse mortgage, you need to be at least 62 years or older, and the home must be your primary residence. Also, in the vast majority of cases, you’ll need to stay in your home as long as you want to keep the reverse mortgage; otherwise, the principal balance of the mortgage will be due.