Proprietary Reverse Mortgage: What You Need to Know

Proprietary Reverse Mortgage: What You Need to Know

Has your client considered a proprietary reverse mortgage option as a senior homeowner? If they have substantial equity in their home, a reverse mortgage is one of the best loan options to access some extra cash. Why not use it to improve their financial situation and meet everyday expenses, debts, and other cash-flow needs? 

Seniors are increasingly turning to various types of reverse mortgages because the rising cost of living demands as much money as possible. A reverse mortgage allows homeowners aged 62 and above to borrow money against home equity, without needing to commit to regular monthly mortgage payments.* 

Federally-insured reverse mortgages may not be as easy to access, or may not be the right option for some borrowers. In such cases, exploring proprietary reverse mortgages is an excellent alternative. These options enable homeowners to take advantage of tax-free funding with only the equity in their home as collateral; they don’t even need to sell or vacate their property. 

If proprietary-funded reverse mortgages sound right for your client, keep reading to learn more about this convenient form of equity-based financing. 

What Are They?

Lenders typically make the reverse mortgage available in three forms: 

• Home equity conversion mortgages (HECM) 
• Single-purpose reverse mortgages 
• Proprietary reverse mortgages 

HECM loans come from a U.S. Department of Housing and Urban Development FHA-approved financial institution and single-purpose loans from a nonprofit local and state government agency. The third type of reverse mortgage, the proprietary reverse mortgage, is an option offered and insured by private loan lenders. 

How does a proprietary reverse mortgage work to convert a portion of the borrower’s home’s equity into cash? The private lender pays out reverse mortgage proceeds in the way that they require. The two main options are usually to receive cash as: 

• a line of credit 
• a single lump-sum payment 

The government does not underwrite or federally insure proprietary loan programs, which means that these private mortgage loan terms do not need to adhere to all Federal Housing Administration limits, unlike HECM loans. The result is that these options typically feature a higher interest rate, a loan origination fee, and possibly a loan servicing fee, which HECM loans may not require. 

Private reverse mortgages are also known as “jumbo” reverse mortgages, thanks to the substantial lines of credit or lump sum proceeds they can offer. Reverse mortgage lenders approve these loans outside of federal limits, which means that they can offer the products for much larger homes that fetch higher equity potential. Many seniors also appreciate the fact that a reverse mortgage application will not affect social security or Medicare claims. 

How Do They Work?

A proprietary reverse mortgage effectively provides a loan based on equity without regular payments to pay down the remaining balance. The loan must pay off any current mortgages or liens, after which the property owner can receive the remaining proceeds in a non-taxable lump sum or line of credit to use for any purpose. 

There are no monthly mortgage payments* on a proprietary reverse mortgage. However, stipulations will include that a borrower must continue to pay property taxes and homeowners insurance. The title of the property must remain in the borrower’s name and serve as their principal residence. 

Private lenders also require borrowers to carry out home repairs promptly so that the property (the lender’s collateral) remains in good condition during the entire reverse mortgage term. The lack of federal insurance also means that proprietary reverse mortgages may have a higher interest rate, however they come with lower closing costs and the same non-recourse feature. 

Difference Between a Proprietary Reverse and a HECM

Both funding options allow homeowners to borrow against equity, but: 

• A proprietary reverse mortgage is a privately funded equity loan 
• A home equity conversion mortgage is a government-insured loan 

The Federal Housing Administration federally insures HECM loans and sets loan limits and additional strict guidelines for eligibility. Unlike single-purpose reverse mortgages, proprietary and HECM reverse mortgages allow the borrower to use the loan proceeds for any purpose, including: 

• Home improvement 
• Repairs 
• Medical expenses 
• In-home care 
• Gift purchases 
• Travel 
• Property taxes 
• Daily expenses 
• Utility bills 
• Credit card repayments 

A HECM loan has a maximum limit, regardless of the property’s value. Even if the home value exceeds this limit by a huge amount, the HECM reverse mortgage loan will not be able to exceed the authorities’ set claim amount for the borrower’s property. With a proprietary reverse mortgage, the maximum limit tends to be much higher, and it is unlikely the property’s value will exceed the limit, thus typically allowing the lender to calculate the proceeds using the full home value. 

Seeking approval for a HECM requires borrowers to undergo the lender’s own financial assessment and then move into reverse mortgage counseling from a HUD-approved counseling agency. The session aims to help homeowners understand their financial obligations regarding the loan in detail, so that they are aware of the commitments they need to uphold over the agreed term. 

These types of sessions are useful, even if borrowers need to meet other stipulations. For example, jumbo reverse mortgage loan payments might require keeping up with property taxes, homeowner’s insurance premiums, and repairs to maintain the property’s market value. Annual or monthly mortgage insurance premiums are usually part of Home Equity Conversion Mortgage and Single-Purpose FHA loans only. 

Lenders like Smartfi Home Loans encourage your clients to attend these counseling sessions so that they can accurately assess the potential monthly payments involved. The discussion also makes it easier to compare the details of a reverse mortgage to a traditional mortgage, so that your clients can make an informed decision. 

Is a Proprietary Reverse Right for Your Client?

Is your client a homeowner aged 60** years or older who wants refinancing options? Jumbo or proprietary reverse mortgages or property loans could be helpful. These loans enable senior borrowers to access cash quickly by using the equity, as long as that particular home is their primary residence. 

Proprietary reverse mortgages are useful regardless of whether there is an existing mortgage or the borrower owns their primary residence free and clear. The borrowing is on equity, so the amount of money they can access depends largely on the value of the property they own. Limits may apply, and these loans also feature higher origination fees, lender service fees, and interest rates as they are not under government agency insurance. 

Federally-insured loans, such as the HECM reverse mortgages, require both a financial assessment and counseling session by a HUD-approved counseling agency before the loan approval. 

A single-purpose loan is an affordable reverse mortgage option with strict lender restrictions on how to spend the proceeds. It is more cost-effective than proprietary reverse mortgage loans and might be a better option for specific projects, such as home improvements. As your client’s registered loan officer, consider which of the three options seems like the right loan for your client’s needs by asking: 

• Do they require the most loan proceeds possible? 
• Do they want to use the funds for multiple purposes? 

If your client answered ‘yes’ to the above questions, a proprietary reverse mortgage may be the right loan for them. You can run scenarios with our Choice proprietary reverse mortgage product and compare it to alternative reverse mortgage loan options like a HECM, to help your clients determine the right mortgage for them.  

Take Advantage of Expert Advice on Proprietary Reverse Mortgages Today

A proprietary reverse mortgage is a useful financial tool for seniors who want greater financial security and independence in their golden years. These mortgage platforms, including a privately funded proprietary reverse mortgage loan, enable quick access to cash to meet every day needs more comfortably. Your client might even discover that a reverse mortgage is a solution to staying in a home they love until they are ready to move on. 

If you’d like to learn more about Smartfi’s proprietary reverse mortgage, Choice, and how you can start offering it to your clients, give us a call or fill out this short form. Our team has over 110 years of collective reverse mortgage experience, making them the perfect industry experts to speak with. 

Contact Smartfi Home Loans online or call (877) 816-6706 to explore proprietary reverse mortgage loans today.