Understanding Proprietary Reverse Mortgages: How They Work, Pros & Cons

Proprietary reverse mortgages provide an alternative source of funding for seniors aged 62 and older who wish to tap into their home equity without selling their homes. Unlike HECMs, which are backed by the Federal Housing Administration (FHA), proprietary reverse mortgages are issued by private lenders and are not subject to FHA regulations. These loans are particularly attractive to homeowners with high-value properties that exceed the lending limits imposed by the FHA.

The functionality of proprietary reverse mortgages mirrors that of HECMs in many respects. Homeowners can access their home equity in various ways, including lump-sum payments, monthly annuities, or lines of credit. The amount available for withdrawal is based on factors such as the appraised value of the home, the age of the youngest borrower, and prevailing interest rates. Repayment is typically deferred until the homeowner sells the property, moves out permanently, or passes away. At that time, the loan balance, including accrued interest and fees, must be repaid, usually through the sale of the home.

The market for proprietary reverse mortgages has evolved over the years, with periods of growth and contraction influenced by factors such as changes in housing market conditions, interest rates, and regulatory environment. After the financial crisis of 2008, many lenders withdrew from the proprietary reverse mortgage market, leading to a decline in availability. However, as home prices rebounded and investor confidence returned, some lenders began reintroducing proprietary reverse mortgage products to meet the needs of high-value homeowners.

Proprietary reverse mortgages typically have fewer eligibility requirements compared to HECMs. While HECMs require borrowers to undergo mandatory counseling sessions and adhere to strict financial assessment criteria, proprietary reverse mortgages may have more flexible qualification criteria established by the lender. However, borrowers should be aware that lenders may impose higher interest rates, fees, and lending limits compared to HECMs.

Proprietary Reverse Mortgage:
– Less stringent regulations
– Not insured by the FHA
– No mandatory counseling sessions
– Flexible lending limits determined by the lender
– Potential for higher fees and interest rates
HECM:

Subject to strict FHA regulations
Federally insured
Mandatory counseling sessions required
Lending limit set by the FHA ($970,800 in 2022)
Generally lower fees and interest rates

The decision to opt for a proprietary reverse mortgage or a HECM depends on various factors, including the homeowner’s financial goals, property value, age, and tolerance for risk. Prospective borrowers should carefully compare interest rates, fees, and repayment terms from multiple lenders offering both types of loans. Additionally, exploring alternatives such as home equity loans, HELOCs, or downsizing should be considered.

To qualify for a proprietary reverse mortgage, applicants typically must be aged 62 or older and own a property with substantial equity. While specific eligibility requirements vary by lender, borrowers may need to undergo a financial assessment to determine their ability to meet ongoing loan obligations, including property taxes and homeowners insurance.

The repayment process for a proprietary reverse mortgage is triggered when the borrower no longer occupies the property as their primary residence, either due to sale, relocation, or death. At that time, the loan balance, including accrued interest and fees, must be repaid. If the proceeds from the sale of the home exceed the loan balance, the remaining funds go to the borrower or their heirs.

While proprietary reverse mortgages offer flexibility and access to larger loan amounts, they also come with risks. These may include higher interest rates and fees compared to HECMs, limited lender availability, and the potential for scams targeting vulnerable seniors. Borrowers should carefully review loan terms, seek independent financial advice, and explore alternative financing options before committing to a proprietary reverse mortgage.

Proprietary reverse mortgages can impact inheritance by reducing the equity available in the home. When the borrower passes away or the home is sold, the loan balance, including accrued interest and fees, must be repaid. Depending on the remaining equity in the home, there may be less inheritance available for heirs.

Yes, some proprietary reverse mortgage products allow borrowers to use the loan proceeds to purchase a new home. This option, known as a reverse mortgage for purchase, can be beneficial for seniors looking to downsize or relocate.

If the value of your home decreases after obtaining a proprietary reverse mortgage, it can affect the amount of equity available and the potential loan balance. However, proprietary reverse mortgages are non-recourse loans, meaning the borrower or their heirs are not personally liable for any shortfall if the loan balance exceeds the home’s value at the time of repayment.