Reverse mortgages are typically associated with the Home Equity Conversion Mortgage (HECM), an FHA-insured loan designed to help seniors unlock their home equity. However, for those with higher-value homes or specific needs, proprietary reverse mortgages offer a flexible alternative. These non-FHA loans, often referred to as “jumbo reverse mortgages,” cater to homeowners whose properties exceed the FHA lending limit or who may not qualify for HECMs. In this article, we will explore the unique features of proprietary reverse mortgages, their benefits, and potential drawbacks.
What Is a Proprietary Reverse Mortgage?
A proprietary reverse mortgage is a loan provided by private lenders that is not insured by the Federal Housing Administration. These loans are designed for homeowners who either have high-value homes that surpass the HECM limits or want to access a reverse mortgage without adhering to FHA guidelines.
Since proprietary reverse mortgages are privately funded, they may offer more flexibility in terms of borrowing amounts and loan conditions. However, they also come with different costs, interest rates, and risks compared to federally insured reverse mortgages.
Benefits of Proprietary Reverse Mortgages
- Higher Borrowing Limits: One of the main advantages of proprietary reverse mortgages is the ability to borrow more than the $1.089 million limit set by the FHA for HECMs. Homeowners with properties worth significantly more can access larger loan amounts.
- No Mortgage Insurance Premium: Unlike HECMs, proprietary reverse mortgages do not require an upfront mortgage insurance premium, which can save borrowers a substantial amount of money.
- Flexibility in Terms: Since these loans are not bound by FHA rules, lenders can offer more flexible terms, including potentially lower upfront costs, faster approval processes, or more customized payout options.
- Available to Younger Borrowers: Some proprietary reverse mortgage programs may be available to borrowers as young as 55, while HECMs require borrowers to be at least 62 years old.
Drawbacks and Considerations
- Higher Interest Rates: Proprietary reverse mortgages often come with higher interest rates than HECMs, which can cause the loan balance to grow more quickly.
- Fewer Protections: Since these loans are not insured by the government, they may lack the same consumer protections as HECMs. For example, non-recourse protections, which ensure that borrowers or heirs will never owe more than the value of the home, may not be guaranteed with proprietary loans.
- Fewer Lender Options: Proprietary reverse mortgages are not as widely available as HECMs, which may limit your choice of lenders.
- Higher Loan Fees: While proprietary reverse mortgages may not charge mortgage insurance premiums, they often have higher closing costs and origination fees compared to HECMs.
Who Should Consider a Proprietary Reverse Mortgage?
Proprietary reverse mortgages are ideal for homeowners with high-value properties who need access to more equity than the FHA limit allows. They also make sense for individuals who don’t meet the age requirement for HECMs or who want more flexibility in loan terms. However, prospective borrowers should carefully compare the costs, fees, and protections offered by proprietary reverse mortgages to ensure they align with their long-term financial goals.