What Is a Proprietary Reverse Mortgage?

Definition and Examples of Proprietary Reverse Mortgage

A proprietary reverse mortgage is one of three types of reverse mortgages that allow you to tap your equity, and they can be for more than the Federal Housing Administration (FHA) limit, which is $970,800 for 2022. Proprietary reverse mortgages are backed by private lenders and are typically used by owners of high-end homes.

• Alternate name: jumbo reverse mortgages

Reverse mortgages are a means for homeowners who are age 62 or older to leverage their equity to, for example, supplement their income or pay for health care expenses.

The three types of reverse mortgages are:

• Home equity conversion mortgage (HECM): These loans are backed by the U.S. Department of Housing and Urban Development (HUD).
• Single-purpose reverse mortgage: These mortgages, also backed by HUD, are designed to provide funding for a specific, lender-approved expense such as paying property taxes or completing home maintenance.
• Proprietary reverse mortgage: These loans are backed by the private lender rather than the government, and they can exceed the lending cap placed on HECMs.

Proprietary reverse mortgages are not as common as HECMs, and they tend to be used by people who have a high-value home they either fully own or that has a large amount of equity.

Equity is the difference in the value of the home and any debt you owe. For example, if your home is valued at $1.3 million and you have a $150,000 balance on the mortgage loan, you have $1.15 million in equity. In this case, if a lender allows you to borrow the full amount of your equity, you can take out a proprietary reverse mortgage of $1.15 million to pay off the balance of the mortgage and use the additional cash for other purposes.

How a Proprietary Reverse Mortgage Works

With a reverse mortgage, the lender pays the homeowner/borrower. The money received is usually not taxable and will not affect Social Security or Medicare benefits. As with HECMs, you must meet certain qualifications to receive a proprietary reverse mortgage. These include:

• You must be 62 years or older.
• The home must be your primary residence.
• You must own the property outright or have considerable equity in it.
• You cannot be delinquent on any federal debt.
• You must have the financial resources to remain current on payment of property taxes, homeowners insurance, homeowner association (HOA) fees, etc.

You can take payouts for reverse mortgages in several different ways depending on the lender’s rules. Options include a single disbursement, fixed monthly cash advances, or a combination of monthly cash advancements and a line of credit.

The loan will come with fees and costs. While you may be able to borrow more money than with an HECM, you’ll also likely face higher fees. An HECM loan counselor can help you compare the expenses connected to your loan options.

Alternatives to a Proprietary Reverse Mortgage

Remember, you must be 62 or older to take out any type of reverse mortgage. If you are not yet 62, or if a reverse mortgage doesn’t fit your needs, you can tap your equity in other ways, such as with a home equity loan or home equity line of credit (HELOC).

A home equity loan is a lump-sum loan typically with a fixed interest rate. A HELOC is a revolving line of credit you can access for a set time while making interest payments before your repayment period begins.

You can also use a cash-out refinance to access equity in the home. With this strategy, you use a larger loan to replace your current loan, then receive a check for the difference.

Proprietary Reverse Mortgage vs. Home Equity Conversion Mortgage

Because proprietary reverse mortgages are not FHA-insured, lenders are not bound by restrictions set by the FHA, including the amount that can be loaned and fees that can be charged. This can result in higher interest rates and fees charged in a proprietary reverse mortgage than an HECM.

Also, with a proprietary reverse mortgage, borrowers are not required to take out mortgage insurance, which they are with FHA-insured loans. They also are not required to complete mortgage counseling and financial assessment.

What It Means for Borrowers

A proprietary reverse mortgage can be a useful financial product for homeowners who are age 62 or older who need to supplement their finances. It is the only type of reverse mortgage that can lend a borrower the full amount of the value of their home, which is important for those who own high-value homes and want to borrow more than the cap on FHA-insured reverse mortgages.

Consider consulting a financial advisor to guide you through your choices in proprietary reverse mortgages, as well as alternatives such as home equity loans, HELOCs, or cash-out refinances.

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