Navigating the world of purchasing a new home in retirement can be complex. This is especially true when considering the different types of reverse mortgages. Should you consider one of the many proprietary reverse mortgages or a HECM?

A reverse mortgage can be a powerful tool. They allow homeowners aged 55+ to purchase a new home with no monthly mortgage payments. But understanding the different loan types can be challenging. We hope to ease your frustration.

There are two types of reverse mortgage programs: Proprietary Reverse Mortgages for Purchase and the Home Equity Conversion Mortgage (HECM) for Purchase. Each has its unique features, benefits, and potential drawbacks.

Understanding Reverse Mortgages for Purchase

Reverse mortgages are financial products designed for homeowners aged 55+ to purchase a new home with no monthly mortgage payments for life.

However, reverse mortgages are complex financial tools. They come with specific requirements and potential implications for the homeowner’s financial future. It’s crucial to understand these aspects before deciding which kind is optimal for you: The government insured FHA HECM or the various private or proprietary reverse mortgages available from different lenders.

Here are some key points to understand about reverse mortgages:

• The homeowner owns the home. The lenders do not become part owner of the home.
• The loan is repaid when the homeowner sells the home, moves out, or passes away.
• There are different types of reverse mortgages, each with its unique features. These different types consist of:
• FHA HECM reverse mortgages for people age 62+
• Proprietary reverse mortgages for people age 55+ (in most states)
• And in these 2 categories there are adjustable and fixed rate options.

Reverse Mortgages Explained

In a reverse mortgage for purchase, the home buyer must make a large down payment on the home and the reverse mortgage loan covers the rest of the sale price.

The principal and interest on the loan accumulate over time and don’t need to be repaid until the house is sold or another maturity event takes place. The loan is repaid when the homeowner sells the home, moves out, or passes away. These events are known as “maturity events”. The repayment amount cannot exceed the home’s value. This is known as a non-recourse feature, protecting homeowners and their heirs from owing more than the home is worth.

The title of the home stays with the homeowner. However, they must continue to pay property taxes, homeowner’s insurance, and maintain the home according to the loan terms. If these terms are not met, they could also trigger a maturity event, as with most mortgages.

This enables retirees to bypass the obligation of making compulsory monthly mortgage payments or face foreclosure, as would be the case with a traditional mortgage.

Moreover, for clients who intended to buy their home outright, these loans enable them to conserve some of their cash. Alternatively, they can opt for a home in a higher price range that they wouldn’t have afforded if they were to pay in cash.

These are the basic guidelines for all types of reverse mortgages. Now let’s move on to the specific differences in the options.

Proprietary Reverse Mortgages for Purchase Explained

Proprietary Reverse Mortgages for Purchase, also known as private reverse mortgages, are financial products offered by private companies. Unlike federally insured Home Equity Conversion Mortgages (HECMs), proprietary reverse mortgages are not subject to federal loan limits or other FHA requirements, like being 62 or older. This makes them a suitable option for homeowners age 55+, those with higher-value homes, non-traditional income sources, credit issues, or homes that are not FHA-approved.

Proprietary reverse mortgages can be used to purchase a new home. This allows seniors to relocate or downsize without taking on a new monthly mortgage payment. The loan is repaid when the homeowner sells the home, moves out, or passes away. If the loan balance is less than the home’s value at the time of maturity, the remaining equity goes to the homeowner or their heirs.

Eligibility and Loan Limits

To qualify for a Proprietary Reverse Mortgage, homeowners must be at least 55 years old, in most states. The home must be the primary residence. The homeowner’s credit history and financial situation may also be considered by the lender.

There are no federal loan limits for proprietary reverse mortgages. The loan amount is determined by the home’s value, the homeowner’s age, and current interest rates. This can result in a larger loan amount for homeowners with higher-value homes.

Property Types

Proprietary reverse mortgages can be used for single-family homes and some types of multi-family homes. Some lenders may also allow condos and manufactured homes. It’s important to check with the lender about the types of properties they accept.

HECM for Purchase: An Overview

A Home Equity Conversion Mortgage (HECM) for Purchase is a type of reverse mortgage insured by the Federal Housing Administration (FHA). It allows seniors age 62+ to purchase a new primary residence using the loan proceeds. Like other reverse mortgages, a HECM for Purchase does not require monthly mortgage payments.

The loan is repaid when the homeowner sells the home, moves out, or passes away. If the loan balance is less than the home’s value at the time of repayment, the remaining equity goes to the homeowner or their heirs.

Home Equity Conversion Mortgages (HECMs) offer safeguards for spouses younger than 62 years old. However, most private loans necessitate both spouses to be at least 55 years old to qualify for the loan.

Eligibility and Federal Insurance

To qualify for a HECM for Purchase, homeowners must be at least 62 years old. The home must be the primary residence. The homeowner’s credit history and financial situation will be considered during the financial assessment process.

HECMs are federally insured. This means that if the lender is unable to make payments to the homeowner, the FHA will step in. This insurance provides an extra layer of protection for the homeowner, but does come at a cost. The FHA mortgage insurance premium is a loan cost that is included in the loan and will accrue over time.

Loan Limits and Property Types

HECMs are subject to federal loan limits. The maximum loan amount for 2024 is $1,149,825. This limit applies regardless of the home’s value, which can limit the loan amount for higher-value homes.

HECMs can be used for single-family homes, some manufactured homes and FHA-approved condos. Some types of multi-family homes may also be eligible. It’s important to check with the lender about the types of properties they accept.

Key Differences Between Proprietary Reverse Mortgages and HECM Reverse Mortgages

While both Proprietary Reverse Mortgages and HECMs allow seniors to purchase a new home with no monthly mortgage payments, there are key differences to consider. These differences can impact the loan amount, costs, and the level of consumer protection.

• Proprietary Reverse Mortgages are not federally insured, unlike HECMs. This can lead to reduced costs.
• Proprietary Reverse Mortgages often have higher loan limits, making them suitable for higher-value homes.
• The costs and fees can vary between the two types of reverse mortgages. The fees on HECM’s are federally regulated and don’t differ much from lender to lender. You should check with your loan broker to compare the fees for the different proprietary options.
• Consumer protections and non-borrowing spouse rules may differ. HECM’s have protections for spouses younger than 62, but many proprietary loans require both spouses to be 55 or older to be on the loan.

Costs and Fees

Both types of reverse mortgages come with costs and fees. These can include origination fees, closing costs, and ongoing charges like mortgage insurance premiums for HECMs. Proprietary Reverse Mortgages may have different fee structures, so it’s important to understand all the costs before deciding. Whatever you decide, the majority of costs are included in the loan amount.

Consumer Protections and Non-Borrowing Spouse Rules

HECMs come with federal consumer protections. These include the requirement for a third-party counseling session before the loan is approved.

Private reverse mortgages come with their own prerequisites for counseling. However, in certain cases, this counseling doesn’t need to be completed before starting the application process. This allows potential borrowers to find out if they’re eligible before they spend time and resources on the counseling session.

Non-borrowing spouse rules can also differ. For HECMs, if the borrowing spouse passes away, the non-borrowing spouse can continue living in the home. The rules for Proprietary Reverse Mortgages can vary, so it’s important to understand these details.

Making the Right Choice for Your Financial Future

Choosing between a Proprietary Reverse Mortgage and a HECM is a significant decision. It can impact your financial future and the legacy you leave for your heirs. Your loan broker should help you decide what is optimal for you.

It’s crucial to consider your unique needs, goals, and circumstances. This includes your home’s value, your financial needs, and your long-term plans.

Seeking Professional Advice

Given the complexities of reverse mortgages, it’s wise to seek professional advice. We suggest you speak with an experienced reverse mortgage broker who specializes in these loan options. Ask them how many reverse mortgages for purchase they have closed this year and how many of those were the proprietary product.

Understanding Your Options: Private Reverse Mortgages vs. HECM

Understanding the differences between a Proprietary Reverse Mortgage for purchase and a HECM for purchase is crucial for making an informed decision. By considering your unique needs, seeking professional advice, and thoroughly understanding each option, you can choose the financial tool that best supports your retirement goals and financial future.