Who Needs a Proprietary Reverse Mortgage?

Certain homeowners who want to borrow more than typical reverse mortgages allow

Reviewed by Doretha ClemonReviewed by Doretha Clemon

Proprietary reverse mortgages are loans offered by private lenders to homeowners looking to convert their home equity into cash, but the loan amount or home value exceeds the federal limits on reverse mortgages. Also called jumbo reverse mortgages, these loans are available to those age 62 or older and allow you to receive money from your home for any purpose, including for basic living expenses, healthcare costs, or a home remodel.

Typically, home equity conversion mortgages (HECMs) are the most well-known of the reverse mortgage products, but HECMs come with limitations. For some homeowners, a proprietary reverse mortgage may make sense if they seek a larger loan amount than permitted by HECMs.

Key Takeaways

• Proprietary reverse mortgages are jumbo reverse mortgage loans offered by private lenders to homeowners looking to convert their home equity into cash.
• Proprietary reverse mortgages are used when the loan amount or home value exceeds the federally insured reverse mortgage limit.
• Unlike a home equity conversion mortgage (HECM), proprietary reverse mortgages are not backed by the government and have few regulations.
• Private lenders that offer proprietary reverse mortgages may charge a higher interest rate and fees.

What Is a Proprietary Reverse Mortgage?

Home equity conversion mortgages (HECMs) are federally backed and offered by lenders approved by the Federal Housing Administration (FHA). Lenders must abide by the FHA loan limits. For 2024, the maximum reverse mortgage loan limit allowed is $1,149,825.

Proprietary reverse mortgages help homeowners access cash from the equity in their home for an amount that exceeds the limit on a federally insured reverse mortgage. Proprietary reverse mortgages are also available for those with homes valued at more than the limit set by the U.S. government to obtain a reverse mortgage. As a result, proprietary reverse mortgages are often called jumbo reverse mortgages since they’re larger than a traditional HECM.

Private Lenders

Proprietary reverse mortgages are offered and insured by private lenders who are limited only by the amount of risk that they are willing to assume. In other words, the lenders are not limited by the FHA, nor are the loans government-backed.

However, like other reverse mortgages, a proprietary reverse mortgage typically allows you to tap into only a portion of your home’s equity. As with HECMs, how much you can borrow from a proprietary reverse mortgage is based on several factors, including:

• Your age
• The home’s appraised value
• Current interest rates

How Money from a Reverse Mortgage Can Be Used

Both HECMs and proprietary reverse mortgages permit borrowers to spend the funds in any manner they wish. The funds can be used for living expenses, travel, medical expenses, long-term care, or remodeling a home. The only reverse mortgage products that limit how funds are used are single-purpose reverse mortgages, which are typically used to help homeowners pay for property taxes and necessary home repairs.

Payment Options

Finally, unlike other reverse mortgages, proprietary reverse mortgages may not offer different payment options, such as a monthly payment or a line of credit. Instead, the funds may only be available as a lump sum.

HECM vs. Proprietary Reverse Mortgage

An HECM and a proprietary reverse mortgage have many similarities, such as converting the equity in your home into cash. However, distinct differences also exist between the two products. The table below compares some of the key features of an HECM and a proprietary reverse mortgage.

Costs of Proprietary Reverse Mortgages

Proprietary reverse mortgages aren’t federally insured, so there are no up-front mortgage insurance (UFMI) fees or monthly mortgage insurance premiums (MIP) as there are for HECMs. Still, lenders tend to charge higher interest rates and lend lower amounts relative to a home’s value to compensate for the lack of mortgage insurance.

Both a proprietary reverse mortgage and an HECM come with thousands of dollars in closing costs that include property taxes, appraisal, and loan processing fees.

A proprietary reverse mortgage won’t always be the best fit for a homeowner—even one with an expensive home. It is a good idea to compare interest rates and fees from several proprietary reverse mortgage lenders and HECM lenders. That will help you find the best deal based on your age and home value.

Important

Homeowners seeking proprietary reverse mortgages should be extra vigilant of potential scams. The safeguards that are built into HECMs, like mortgage counseling, are not required for proprietary reverse mortgages.

Who Is Eligible for a Proprietary Reverse Mortgage?

Proprietary reverse mortgages are offered by private lenders to people nearing retirement age 62 or older. You can use a proprietary reverse mortgage to tap into your home’s equity for cash when the home’s value or loan amount exceeds the federal guidelines of a standard reverse mortgage. Proprietary reverse mortgages are not federally insured, and private lenders may limit the loan amount based on various factors, including the home’s appraised value.

What Is a Single-purpose Reverse Mortgage?

Single-purpose reverse mortgages provide homeowners who are age 62 or older access to part of their home’s equity to pay for a lender-approved expense—typically property taxes and home repairs. Most are offered by state and local government agencies and nonprofit organizations.

When Do I Have to Repay a Reverse Mortgage?

In general, you must repay a reverse mortgage if you move out of the home, sell it, or die. The lender can also require that the loan be repaid if you don’t pay your property taxes or stop taking care of the home.

The Bottom Line

If you’re a homeowner age 62 or older, you may be able to tap into your home’s equity with a reverse mortgage to pay for living expenses, a home remodel, or other expenses. Although a standard reverse mortgage is most common, some homeowners may opt for a proprietary reverse mortgage that allows them to borrow a larger amount than federal limits.

If considering an HECM, you must receive counseling from a government-approved agency to help you evaluate the pros and cons of reverse mortgages. Counseling is not federally mandated for proprietary reverse mortgages, but private lenders may require it. However, counseling and advice from a financial professional can help you learn whether a reverse mortgage is right for you.

Read the original article on Investopedia.