Understanding the Difference Between HECM Loans and Proprietary Reverse Mortgages

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Reverse mortgages provide a way for homeowners, particularly seniors, to access their home equity without having to sell their property. However, not all reverse mortgages are the same. The two primary types of reverse mortgages available today are Home Equity Conversion Mortgages (HECMs) and proprietary reverse mortgages. Understanding their differences can help borrowers determine which option best suits their financial needs.

What is a HECM Loan?

A Home Equity Conversion Mortgage (HECM) is the most common type of reverse mortgage, backed by the Federal Housing Administration (FHA) and insured by the U.S. Department of Housing and Urban Development (HUD). Because of this government backing, HECM loans offer several consumer protections and standardized features.

Key Features of HECM Loans:

  1. FHA-Backed and Federally Regulated
    • The FHA insures HECM loans, ensuring that borrowers will receive their loan payments even if the lender goes out of business.
  2. Age Requirement
    • Borrowers must be at least 62 years old to qualify.
  3. Loan Limits
    • HECM loans have a maximum loan limit that is determined by HUD guidelines. As of 2024, the loan limit is $1,209,750, meaning borrowers cannot access more than this amount regardless of their home’s value.
  4. Property Eligibility
    • The home must be a primary residence and meet FHA property standards. Eligible properties include single-family homes, FHA-approved condos, and certain multi-unit properties (up to four units).
  5. Mandatory Counseling
    • Borrowers are required to attend an independent HUD-approved counseling session before obtaining a HECM loan to ensure they fully understand the terms and implications.
  6. Payment Options
    • Borrowers can choose to receive funds as a lump sum, monthly payments, a line of credit, or a combination of these options.
  7. Non-Recourse Loan
    • HECMs are non-recourse loans, meaning borrowers (or their heirs) will never owe more than the home’s value, even if the loan balance exceeds the home’s worth.

What is a Proprietary Reverse Mortgage?

A proprietary reverse mortgage, sometimes referred to as a jumbo reverse mortgage, is a private loan offered by lenders without government insurance. These loans are designed for homeowners with high-value properties who need access to greater loan amounts than what the FHA allows with HECM loans.

Key Features of Proprietary Reverse Mortgages:

  1. Privately Funded
    • Unlike HECMs, proprietary reverse mortgages are funded by private lenders and are not insured by the FHA or HUD.
  2. Higher Loan Limits
    • These loans are ideal for high-value homes as they allow borrowers to access significantly larger loan amounts, sometimes exceeding $4 million, depending on the lender.
  3. Age Requirements May Vary
    • Some proprietary reverse mortgages allow borrowers as young as 55 years old, unlike HECMs which require borrowers to be 62 or older.
  4. More Flexible Property Eligibility
    • Proprietary reverse mortgages may be available for properties that do not meet FHA standards, including non-FHA-approved condos, luxury homes, and high-value properties.
  5. No Mandatory Counseling
    • While counseling is recommended, it is not mandatory for proprietary reverse mortgages, unlike HECMs.
  6. Fewer Fees and Closing Costs
    • Since these loans are not FHA-insured, borrowers do not have to pay FHA mortgage insurance premiums (MIP), which can lower closing costs.
  7. Customizable Loan Terms
    • Proprietary reverse mortgages often provide more flexible terms, such as customized disbursement plans, catering to the borrower’s unique needs.

Which Reverse Mortgage is Right for You?

Choosing between a HECM loan and a proprietary reverse mortgage depends on your financial situation and home value. Here are some general guidelines:

  • If your home is valued under $1.1 million and you want FHA-backed protections, a HECM loan may be the best option.
  • If your home is worth more than $1.1 million and you want access to larger loan amounts, a proprietary reverse mortgage could be a better fit.
  • If you are under 62 years old and looking for a reverse mortgage option, a proprietary loan may be your only choice.
  • If you prefer lower upfront costs and no mortgage insurance premiums, a proprietary reverse mortgage might be advantageous.

Conclusion

Both HECM loans and proprietary reverse mortgages offer unique benefits, and the right choice depends on your financial goals, home value, and personal needs. HECMs provide government-backed security, standardized protections, and lower-risk options, while proprietary reverse mortgages offer higher loan limits, more flexibility, and fewer restrictions. By understanding these differences, homeowners can make informed decisions about how best to tap into their home equity in retirement or for other financial needs.

Written on Apr 1, 2025