Reverse mortgages are not all created equally. Many reverse mortgages are home equity conversion mortgages (HECMs) backed by the government. However, there is another type of reverse mortgage, known as a proprietary reverse mortgage, that is funded by specific lenders. Both types of reverse mortgages are regulated, and both have their own benefits and limitations. Understanding the difference between a HECM and a proprietary reverse mortgage can help you decide which makes the most sense for your financial situation and goals.
What Makes a Mortgage a Reverse Mortgage?
In 1961, the first unofficial reverse mortgage was made in a bank in Portland, Maine. Reverse mortgages, specifically HECMs, were not recognized until 1987, when the pilot program of HECMs was launched. In 1989, Federal Housing Administration (FHA) issued its first insured reverse mortgage. This legislation created the standard for HECMs in the United States.
To be considered a reverse mortgage, a loan must have the following features:
- Borrowers must live in their homes as their primary residence.
- Borrowers are not required to make monthly mortgage payments, but the balance, including interest on the loan, will be owed in full when the loan comes due.
- The borrowers must continue to pay taxes, home association dues, and property insurance.
- Borrowers have at least 50% equity in the home. This amount is dependent on market and interest rate conditions.
- It is nonrecourse, meaning neither the borrower nor their heirs will owe more than the home’s market value when it is sold to satisfy the loan balance.
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What Makes a Reverse Mortgage a HECM?
Available through Federal Housing Administration (FHA) approved lenders, home equity conversion mortgages (HECMs) are the only government-insured reverse mortgage. The Department and Housing and Urban Development (HUD) sets limits on HECM origination fees and provides consumer and lender protections through FHA insurance. In addition to loan protection, Government backing gives borrowers the benefit of flexible credit and income requirements. Government regulations also mean that HECM borrowers can take their loan proceeds in a variety of ways, including as a lump sum, a line of credit, regular payments, or a combination of the three.
According to the National Reverse Lenders Mortgage Association (NRMLA), HECMs are the most popular type of reverse mortgage. These loans are available in all 50 states. In 2020, 90% of all reverse mortgages were HECMs. However, government backing also means HECMs have restrictions that proprietary mortgages often don’t.
To qualify for a HECM, borrowers must:
- Be 62 years old.
- Pay for mortgage insurance.
- Undergo reverse mortgage counseling from an FHA-approved third-party counselor.
Other restrictions include:
- Principal limit. HECM borrowers can only take equity up to the FHA’s maximum lending limit of $1,089,300 (in 2023), regardless of how much equity they have in their homes.
- Payout restrictions. If a borrower chooses to receive their loan proceeds as a lump sum, they can take only 60% of their available equity in the first year. Or, should their mandatory obligations (i.e., any outstanding liens, taxes, or costs that must be covered before taking the mortgage) exceed 60% of their equity, they can take the amount required to fulfill their mandatory obligations plus 10% of the principal limit.
- Property requirements. A HECM is only available for FHA-approved properties.
How Is a Proprietary Reverse Mortgage Different?
Proprietary mortgages are also reverse mortgages, but unlike HECMs, they are funded by private lenders and are not government-backed. These loans aren’t bound by the restrictions and limits set by the FHA. Lenders have the flexibility to determine their own age requirements, the kinds of properties that qualify for the loan, how a borrower receives loan proceeds, and lending limits.
The following are ways in which proprietary reverse mortgages differ from HECMs:
- Lower age requirement. Proprietary reverse mortgage age requirements vary by lender, but borrowers can be as young as 55 to qualify.
- Higher lending limit. A HECM restricts a borrower’s lending limit to $1,149,825, while a proprietary reverse mortgage allows homeowners to borrow up to $4 million.
- Less payment flexibility. While HECMs allow borrowers to choose from a range of payment options, proprietary reverse mortgages don’t necessarily offer the same range of options.
- Property requirements. Proprietary lenders are not required to make loans only to FHA-approved properties, which gives proprietary mortgage borrowers more flexibility on home options.
- No required mortgage Insurance. Proprietary reverse mortgage borrowers are not required to have mortgage insurance.
- No payout limits. In a proprietary reverse mortgage, a reverse mortgage borrower may receive 100% of all loan proceeds even if they choose to receive funds as a lump sum.
- Fewer protections for non-borrowing spouses. The protections afforded to a non-borrowing spouse in a HECM loan do not necessarily apply in a proprietary reverse mortgage. The application of these protections is dependent on the lender.
Key Differences Between the Two Types of Reverse Mortgages
Here is a side-by-side comparison of the two types of reverse mortgage:
| HECM | Proprietary Reverse Mortgage | |
|---|---|---|
| Borrower Age | The borrower must be 62 years or older to qualify for a HECM. | Varies by state and lender. Could be as young as 55 to qualify. * |
| Government Regulation | The federal government regulates HECMs. | Not regulated by the federal government. Oversight managed by state banking regulators. |
| Lending Limits | Homeowners can borrow up to $1,089, 300 (in 2023). | Homeowners can borrow a substantial amount up to $4,000,000**. |
| Mortgage Insurance | Borrowers are required to pay annual and monthly mortgage insurance. | Mortgage insurance is not required. |
| Loan Proceeds | Borrowers can receive loan proceeds in a lump sum, a monthly payment or line of credit. | Generally, a lump sum is the only available option, but this is lender dependent. |
| Non-borrowing Spouse Protections | Eligible non-borrowing spouses are protected. | Non-borrowing spouses may not be protected. |
| Property Requirements | Must be FHA-approved. | Not required to be FHA-approved. |
HECMThe borrower must be 62 years or older to qualify for a HECM.
Proprietary Reverse MortgageVaries by state and lender. Could be as young as 55 to qualify. *
HECMThe federal government regulates HECMs.
Proprietary Reverse MortgageNot regulated by the federal government. Oversight managed by state banking regulators.
HECMHomeowners can borrow up to $1,089, 300 (in 2023).
Proprietary Reverse MortgageHomeowners can borrow a substantial amount up to $4,000,000**.
HECMBorrowers are required to pay annual and monthly mortgage insurance.
Proprietary Reverse MortgageMortgage insurance is not required.
HECMBorrowers can receive loan proceeds in a lump sum, a monthly payment or line of credit.
Proprietary Reverse MortgageGenerally, a lump sum is the only available option, but this is lender dependent.
HECMEligible non-borrowing spouses are protected.
Proprietary Reverse MortgageNon-borrowing spouses may not be protected.
HECMMust be FHA-approved.
Proprietary Reverse MortgageNot required to be FHA-approved.
*Finance of America Reverse pioneered the age limit of 55.
**Finance of America Reverse Equity Avail product sets a lending limit of $4,000,000. Other lenders may have different lending amounts.
Seniority is published by Finance of America Reverse LLC. The views expressed in this publication are those of the author alone and do not necessarily reflect the views and opinions of Finance of America Companies. This article is intended for general informational and educational purposes only and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.
