Reverse Mortgages: HECM vs. Proprietary

Reverse Mortgages

Reverse mortgages offer a clever way to tap into your home’s equity. Different from the usual mortgage where you pay the bank every month, reverse mortgages let homeowners 62 or older get money from the lender, turning their home equity into cash.

This also gives retirees a way to support their lifestyle, cover medical bills, or handle other expenses without worrying about monthly mortgage payments.

There are two main kinds of reverse mortgages to consider: Home Equity Conversion Mortgages (HECM) and proprietary reverse mortgages.

  • HECM, established and insured by the Federal Housing Administration (FHA), is the most common type. It offers a regulated framework and is accessible to a wide range of eligible borrowers.
  • On the other hand, proprietary reverse mortgages, often offered by private lenders, provide an alternative avenue for homeowners with unique needs or higher home values.

The choice between HECM and proprietary reverse mortgages is not just a financial decision; it’s a critical step towards shaping one’s retirement and future financial well-being.

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While both options enable the conversion of home equity into funds, they each possess unique features, eligibility criteria, and implications.

Read below to learn more.

What Are HECM Reverse Mortgages?

HECMA Home Equity Conversion Mortgage (HECM) is a specialized financial tool that allows homeowners aged 62 and above to access the equity they’ve built in their homes over the years.

Unlike traditional mortgages, HECM reverses the equation by allowing homeowners to receive payments from the lender.

The purpose is to provide financial flexibility and security to retirees, helping them to maintain their quality of life and cover expenses without needing to sell their homes.

How HECM Loans Are Insured by the Federal Housing Administration (FHA)

This insurance provides protection to both borrowers and lenders.

For borrowers, it ensures that even if the lender goes out of business or if the loan balance exceeds the value of the home, they won’t be forced to leave their homes. For lenders, FHA insurance guarantees repayment, reducing the risk associated with offering reverse mortgages.

Key Features and Benefits of HECM Reverse Mortgages

Eligibility Requirements and Age Restrictions

  • Borrowers should be at least 62 years old.
  • They must also own the property outright or have a significant amount of equity.
  • Borrowers are required to participate in a counseling session to ensure they fully understand the terms and implications of the reverse mortgage.

Payment Options: Lump Sum, Monthly Payments, and Lines of Credit

Borrowers can receive their funds in a lump-sum, providing a substantial amount upfront.

Alternatively, they can opt for monthly payments that supplement their retirement income. Another popular option is a line of credit, which allows borrowers to access funds as needed while accruing interest only on the amount withdrawn.

Loan Limits and How They Are Determined

HECM loans have loan limits that cap the amount a borrower can receive based on the value of their home, the borrower’s age, and current interest rates. These limits are set to prevent borrowers from tapping into their entire home equity at once, which could lead to financial instability.

The FHA calculates these limits to ensure that reverse mortgages are used responsibly and sustainably.

HECM reverse mortgages offer a gateway to unlocking the value stored within a home, providing retirees with the means to enhance their financial security and enjoy their golden years to the fullest.

What Are Proprietary Reverse Mortgages?

Proprietary reverse mortgages, often referred to as “jumbo” or “non-HECM” reverse mortgages, offer an alternative avenue for homeowners to tap into their home equity.

Unlike HECM reverse mortgages, which are backed by the Federal Housing Administration (FHA), proprietary reverse mortgages are provided by private lenders. This distinction leads to unique features and eligibility criteria that set them apart from the standard HECM offerings.

How Proprietary Reverse Mortgages Are Offered by Private Lenders

Proprietary reverse mortgages are customized solutions offered by private lenders who design their own terms, structures, and eligibility requirements.

Because they are not governed by the regulations that HECM reverse mortgages adhere to, proprietary reverse mortgages can offer more flexibility and tailored options to borrowers.

This private sector approach aims to cater to homeowners with specific financial situations or those with higher home values.

Advantages and Considerations of Proprietary Reverse Mortgages

  • Flexibility in Loan Amounts and Property Values

For homeowners with substantial home equity, proprietary reverse mortgages can provide the means to access a larger portion of their equity than traditional HECM reverse mortgages might allow.

  • Potential Higher Loan Limits for Those with Higher Home Values

Proprietary reverse mortgages often cater to homeowners whose property values exceed the limits set by HECM reverse mortgages. This opens the door for borrowers with valuable homes to tap into a greater portion of their equity.

While HECM loans have federally mandated limits, proprietary reverse mortgages have the potential to accommodate homeowners with higher-valued properties.

  • How Interest Rates and Terms Can Vary Among Lenders

Because proprietary reverse mortgages are offered by private lenders, borrowers may encounter variations in interest rates, terms, and eligibility requirements.

This diversity allows borrowers to explore a range of options and choose the terms that best align with their financial goals. However, it’s essential for borrowers to carefully review and compare the terms offered by different lenders to make an informed decision.

Comparing HECM and Proprietary Reverse Mortgages

Reverse Mortgages HECM vs. ProprietaryHow Interest Rates Are Determined for HECM and Proprietary Reverse Mortgages

Interest rates play a crucial role in the financial landscape of both HECM and proprietary reverse mortgages.

For HECM reverse mortgages, interest rates are primarily influenced by market conditions and are regulated by the FHA. These rates can change over time and can affect the amount of funds available to borrowers.

Proprietary reverse mortgages, being offered by private lenders, provide a different approach. Interest rates for proprietary reverse mortgages are typically based on the lender’s evaluation of risk and market conditions.

This can result in more variability in interest rates among proprietary offerings.

Upfront Costs, Ongoing Fees, and Potential Closing Costs

Both HECM and proprietary reverse mortgages come with costs, and borrowers should consider the following key points when evaluating the costs associated with both mortgages:

  • Both types of reverse mortgages may have upfront costs. For HECMs, these could include origination fees and mortgage insurance premiums.
  • Ongoing servicing fees for the loan should be factored into the overall cost of both HECM and proprietary reverse mortgages.
  • Closing costs can be another element to consider for both types of mortgages.
  • Proprietary reverse mortgages can have variable costs among different lenders.
  • Due to the customization offered by proprietary reverse mortgages, the terms and costs can differ among lenders. Borrowers should be prepared to assess these variations.

Eligibility and Age Requirements

Eligibility requirements for HECM and proprietary reverse mortgages can be quite different. Here are the key points to consider:

  • Regulation: HECM reverse mortgages follow specific criteria set by FHA, making these standardized across all borrowers. Proprietary reverse mortgages, however, are designed by individual lenders and may vary significantly in their criteria.
  • Age Requirement: The minimum age for HECM reverse mortgages is typically 62 years old. Proprietary reverse mortgages can have different age requirements, depending on the lender’s policies. These may allow younger retirees to access their home equity.
  • Property Type: For HECM, the property type is also considered, whereas this may not be the case for all proprietary reverse mortgages.
  • Flexibility: Proprietary reverse mortgages offer more flexibility due to their individual design, but this means the criteria can differ widely among lenders.

Loan Limits and Property Values

HECM reverse mortgages have federally established loan limits that are determined by factors such as the borrower’s age, the property’s appraised value, and current interest rates. These limits prevent borrowers from withdrawing the entire equity in one go and are designed to ensure financial stability.

For proprietary reverse mortgages, loan limits can vary among lenders, and some lenders may offer more generous limits based on higher property values or unique borrower profiles.

Property values play a pivotal role in determining the loan amounts available to borrowers. In both HECM and proprietary reverse mortgages, the higher the property value, the greater the potential loan amount.

However, proprietary reverse mortgages may accommodate higher home values more effectively, offering borrowers with valuable homes access to a larger portion of their equity.

Application and Approval Process for Reverse Mortgages

Applying for an HECM reverse mortgage is a process that involves several steps, each designed to guide borrowers through the journey to home equity conversion.

This process is outlined as follows:

  • Choosing an FHA-approved lender: Start by selecting a lender who is approved by the FHA. This lender will guide you through the process.
  • Assessment of borrower’s eligibility: The lender will evaluate your eligibility for the loan, taking into account your age, the value of your home, and your financial situation.
  • Discussion of payment options: Your lender will discuss the various payment options available to you and help you choose the one that best suits your needs.
  • Counseling session: A mandatory counseling session with a HUD-approved counselor ensures that you fully understand the implications, terms, and responsibilities of the reverse mortgage.
  • Property Appraisal: An appraisal is conducted to determine the current market value of your property.
  • Finalizing loan terms: After the appraisal, the lender will finalize the loan terms.
  • Underwriting and closing: If all requirements are met, the loan is submitted for underwriting. Once approved, the loan is ready for closing.

Process for Applying for Proprietary Reverse Mortgages

Applying for proprietary reverse mortgages entails a similar process, but with variations depending on the lender.

The process of applying for proprietary reverse mortgages involves several key steps:

  1. Selection of a private lender: Borrowers need to select a private lender that provides proprietary reverse mortgages.
  2. Initiation of the application process: Once a lender is chosen, the application process begins.
  3. Eligibility assessment: The lender evaluates the borrower’s eligibility for the mortgage.
  4. Discussion of payment options and terms: The lender discusses various payment options and outlines the terms of the loan.
  5. Property appraisal: A property appraisal is typically conducted to determine the value of the borrower’s property.
  6. Submission of necessary documentation: Borrowers may be required to present documentation regarding their financial situation, property ownership, and any outstanding liens.
  7. Review and approval: Lastly, the application is reviewed, and if all criteria are met, the loan goes through the underwriting process for approval.

Notable Differences in Documentation and Requirements

While the core application steps are comparable between HECM and proprietary reverse mortgages, differences may arise in the documentation and requirements.

Private lenders offering proprietary reverse mortgages might have specific criteria and documentation requests that vary from standard HECM processes. These can include additional financial disclosures, property-related documents, and lender-specific prerequisites.

It’s important to note that the application process for proprietary reverse mortgages may differ more significantly among lenders due to the flexibility they have in designing their products.

Thus, borrowers should be prepared to review and fulfill unique documentation requests based on their chosen lender’s guidelines.

Final Thoughts

Reverse mortgages are critical financial tools that could boost your retirement by unlocking your home’s equity. The choice between HECM and proprietary reverse mortgages is crucial and will significantly impact your financial path.

Fully understanding both options, considering your personal needs, and taking advice from financial experts will lead you to a decision that supports your retirement objectives. Always remember that the unique conditions of your finances and property values influence your choice.

Through careful exploration, you’re setting the foundation for a secure retirement. Whether you choose HECM’s conventional structure or the custom approach of proprietary reverse mortgages, the most important thing is to stay well-informed and select what best suits your goals and secures your future.

At Sprint Funding, we’re committed to helping you make the best financial decisions for your retirement. Our team of expert advisors understands the intricacies of reverse mortgages and is ready to guide you through the process.

Whether you’re considering a traditional Home Equity Conversion Mortgage (HECM) or a proprietary reverse mortgage, we’ll explore all options to find the right fit for your needs. Don’t let financial anxieties cloud your golden years – let us help you make the most of your home’s equity.