If you’re in the market for a loan that can convert your home equity into cash flow or a line of credit in retirement, chances are you have explored the option of a reverse mortgage.
But the reverse mortgage is not one-size-fits-all. Many people don’t know that there are several products to choose from, both under the Federal Housing Administration’s popular Home Equity Conversion Mortgage (HECM) and private loan options.
For the last several years, the number of reverse mortgage products on the market has been limited to the government-insured HECM and a small handful of other loans for people with homes valued at around $600,000 or more.
Recent changes to the Federal Housing Administration’s HECM send some lenders to revisit the opportunity for new Non-FHA and jumbo reverse mortgages that will give borrowers even more options when tapping their home equity in retirement.
Non-FHA reverse mortgages in 2023
FHA may soon become less competitive relative to the private market because of loan limits set by the federal government. FHA limits how much its lender-partners can lend through its insurance programs. Historically, this level was set at a cap of $417,000 for reverse mortgages.
However, when lending was largely restricted across the private market during the housing crisis, the government raised that cap to $1,089,300. This made government home loans more desirable for homeowners of all different home values. It also made it harder for private lenders to compete.
The rise in the lending cap is temporary, however, and reverse mortgage lenders are seeing the point when loan limits retreat to their historical level as a chance to offer more products to borrowers whose homes are valued over the FHA lending limit.
What’s the difference?
As with any FHA-insured loan, a HECM reverse mortgage falls under the government’s requirements when it comes to making the loan and then providing service to the borrower throughout the life of the loan.
FHA only insures certain property types, for example. If you live in a manufactured home or a co-op, you likely won’t qualify for an FHA reverse mortgage. A private loan can offer more options to the borrower since it isn’t tied to the government’s rules.
It also creates more competition in the market, allowing borrowers even more choices.
When will the new loans be available?
Borrowers with high home values can access at least one non-FHA reverse mortgage option. Several additional lenders, however, have said they will be offering private reverse mortgage products in 2014.
If you are seeking a reverse mortgage, remember that the HECM is just one of the 3 types of reverse mortgages. It can help retirees to boost cash flow, protect against market risk, or provide a line of credit for emergency uses in retirement. But other options are also worth exploring.
Non-FHA vs. HECM Product Comparison
|Compare Features||Non-FHA||HECM Reverse Mortgage|
|Borrower Minimum Age||55||62|
|Maximum Lending Limit||$4,000,000||$1,089,300|
|Eligible Properties||Single Family (SRF), FNMA warrantable Condo, Townhome, 1-4 Units.||Single Family (SRF), HUD Approved Condo, Townhome, 1-4 Units.|
|Line of Credit||10 Year Draw Period||Lifetime|
|Line of Credit Growth Rate||Limited to 7 Years||Lifetime|
|Tenure Payment Plan||No||Yes|
|Low/No Closing Costs||Yes||No|
|Younger Spouse Protection||No||Yes|
|Use for Home Purchase||Yes||Yes|