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, and what many people don’t know is there are several products to choose from, both under the Federal Housing Administration’s popular Home Equity Conversion Mortgage (HECM), as well as 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 very small handful of other loans for people with homes valued around $600,000 or more.
But recent changes to the Federal Housing Administration’s HECM are leading some lenders to revisit the opportunity for new jumbo reverse mortgages that will give borrowers even more options when it comes to tapping their home equity in retirement.
Two reasons. First, FHA may soon become less competitive relative to the private market because of loan limits set by the federal government. And second, FHA has recently changed its reverse mortgage rules.
Loan limits. FHA sets a limit on 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, during the housing crisis, when lending was largely restricted across the private market, the government decided to raise that cap to $822,375.
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 raise in the lending cap is temporary, however, and reverse mortgage lenders are seeing the point when loan limits retreat to their historic 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?
Currently, borrowers with very 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, keep in mind that the HECM is just one type of reverse mortgage.
It can help retirees to boost cash flow, protect against market risk, or simply provide a line of credit for emergency uses in retirement. But there are other options that may also be worth exploring.
Non-FHA VS HECM Product Comparison
Compare Features Non-FHA HECM Reverse Mortgage
Borrower Minimum Age 60 62
Maximum Lending Limit $4,000,000 $822,375
Eligible Properties Single Family (SRF), FNMA warrantable Condo, Townhome, 1-4 Units. Single Family (SRF), HUD Approved Condo, Townhome, 1-4 Units.
Lump Sum 100% Limited*
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
Are there non-FHA reverse mortgages?
Yes, there are. They are typically referred to as Jumbo, private or proprietary reverse mortgages and have different guidelines than HUD and usually larger loan amounts available.
What are the rates for non-FHA reverse mortgages?
Those vary with the program and the type of loan. There are fixed rate loans and adjustable rate loans available but when you consider there is no Mortgage Insurance required, the rates are competitive for the additional property types/values they will accommodate.
How to find a non-FHA lender?
To find a non-FHA lender/reverse mortgage, you should search the terms “Proprietary Reverse Mortgage”, “Jumbo Reverse Mortgage” and “Private Reverse Mortgage”.
What is HUD’s involvement in reverse mortgages?
HUD is not a lender but insures the loans with Mortgage Insurance premium that protects borrowers, lenders and investors. HUD does not underwrite and close the loan, the lender does, but must do so in accordance with HUD requirements in order to be eligible for the Mortgage Insurance.
What are the different types of reverse mortgages?
There are the standard HUD or FHA-insured loans as well as the jumbo or proprietary reverse mortgages. Jumbo/Proprietary reverse mortgages are both private programs not requiring mortgage insurance and both HUD and private programs may be used for refinancing existing properties or purchasing new homes.
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