Proprietary reverse mortgage
What is it and how does it work?
If you are over the age of 62, you might be considering a reverse mortgage as a way to access the equity in your home and supplement your income.
In a reverse mortgage, the lender provides the homeowner a lump sum or regular payments in exchange for their home equity. The loan is then repaid when the borrower dies or sells the home. As with any loan, there are pros and cons that are important to understand.
If your home is over the Federal Housing Administration limit of $822,375 and you want to borrow a large amount, a proprietary reverse mortgage is a better option than other types of reverse mortgages. A proprietary reverse mortgage is a privately backed loan that allows homeowners with higher-value properties to borrow more money.
What is a proprietary reverse mortgage?
A proprietary reverse mortgage is a reverse mortgage loan that is issued and backed by a private company. It is sometimes called a jumbo reverse mortgage because the borrowing amount is not limited by the FHA.
There are two other types of reverse mortgages:
- HECM: A Home Equity Conversion Mortgage (HECM) is a federally insured reverse mortgage and the most popular type of reverse mortgage. You can use the funds for any purpose. To qualify, you must be 62, own your property outright or have little left to pay on your mortgage, use the property as a principal residence, not be delinquent on federal debt and be able to pay for property taxes and insurance. You’re also required to meet with an approved counselor for an information session.
- Single-purpose: A single-purpose reverse mortgage is offered by a local government, state government or nonprofits, and it can only be used for a purpose specified by the lender (e.g., home repairs, property taxes). A single-purpose reverse mortgage is less expensive than a proprietary reverse mortgage or a HECM, and it’s easier to qualify for.
For more information, read about the differences between reverse mortgages, home equity loans and HELOCs.
How do proprietary reverse mortgages work?
With a proprietary reverse mortgage loan, you borrow tax-free money against the equity in your home, but you don’t have to make monthly payments back to the lender. Instead, the loan is usually repaid once you no longer live in the home. The home is used as collateral by the lender to guarantee the loan.
In a proprietary reverse mortgage:
- The lender pays off the amount remaining on your mortgage (if necessary).
- The lender converts part of the equity in your home to a lump-sum payment or regular payments.
- Interest is accrued and added to the loan balance.
- The entire loan balance comes due when you die, move from the home or sell the home.
While you are not responsible for mortgage payments anymore, you continue to pay property taxes and homeowners insurance. You are also responsible for upkeep of the home and keeping it in livable condition. The title to the property is still in your name.
Payments made to you for a proprietary reverse mortgage are made in either a lump sum or in regular payments. The money you receive is tax-free.
The amount you are able to borrow in a reverse mortgage depends on many factors, including:
- Your age
- The interest rate for the reverse mortgage
- The current market value of the home
- The amount owed on the current loan
Each lender has different criteria. Because a proprietary reverse mortgage is not government-backed, you might qualify for a larger loan, but the interest rates are usually higher.
How do I pay back a proprietary reverse mortgage?
The principal and interest on a reverse mortgage loan typically become due when any one of the following events occurs:
- The borrower dies.
- The borrower moves out of the home.
- The borrower sells the home.
- The home is not maintained properly.
- Property taxes or home insurance payments are missed.
If any of these occur, you will need to work with the lender and sell the property to repay the loan or refinance with a forward mortgage loan.
There is an opportunity for beneficiaries to gain ownership of the home if a death occurs. They may have 30 days to decide if they want to pay off the mortgage or come to an arrangement with the lender to repay the loan. If the heirs decide they do not want the property, the lender will start the foreclosure process to sell the home and repay the mortgage balance.
Read about paying back a regular reverse mortgage for more information.
Who qualifies for a proprietary reverse mortgage?
A proprietary reverse mortgage could make sense if your home is worth more than $822,375.
To qualify for a proprietary reverse mortgage, you must meet certain requirements:
- Be at least as old as the minimum age established by the lender
- Have substantial equity in your home
- Live in the home as your primary residence
- Be able to maintain the home and pay taxes and insurance
Because there are no monthly payments, reverse mortgage lenders don’t use income in approving a reverse mortgage. They might make sure you have the funds to pay tax and insurance bills, although they can also allocate a part of your loan payments to cover these.
Unlike with HECM loans, the proprietary reverse mortgage process does not require counseling with a government-approved counselor.
How much does a proprietary reverse mortgage cost?
Like with other types of mortgages, there are closing costs involved with reverse mortgages, like an origination fee, a servicing fee and third-party charges. Many of these costs can be rolled into the loan and won’t need to be paid until the mortgage comes due.
The ongoing costs of a proprietary reverse mortgage include:
- Property taxes
- Homeowners insurance premiums
- Costs of maintaining the home
Because you are not making monthly payments and interest is accruing, the loan balance will increase and your equity will decrease. This is the opposite of a regular mortgage, where the loan balance is decreasing and your equity is increasing as you make monthly payments.
The interest rate on a proprietary reverse mortgage is often higher than on a federally backed mortgage. However, because the FHA doesn’t regulate this type of loan, mortgage insurance usually isn’t required.
Pros and cons of a proprietary reverse mortgage
A proprietary reverse mortgage can benefit many retirees and older adults who want access to the cash tied up in their home equity. However, there are also drawbacks to consider.
- Use funds for any purpose
- Tax-free funds
- Higher loan amounts for higher-value homes
- Multiple ways to receive funds
- No government-required counseling
- Higher interest rates
- Loss of home equity
- Potential for scams
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