What Are The 3 Types Of Reverse Mortgages?- Briefly Explained In 2024

The three types of reverse mortgages are 

1. FHA-insured HECM, 

2. Proprietary Reverse Mortgage without FHA Insurance and 

3. Single-purpose Reverse Mortgage

Shopping for a reverse mortgage but have little or no idea about it? 

Then this post can be a great help. Because here I am going to discuss, what are the 3 types of reverse mortgages? What are their advantages and disadvantages of them? which one is best suited for you and many more related queries. So, stay with me till the end. 

What Are The 3 Types Of Reverse Mortgages?

There can be several types of reverse mortgages available for you depending on your state. However, the main 3 types of reverse mortgages are 

1. Federal Housing Administration Insured Home Equity Conversion Mortgage

2. Proprietary Reverse Mortgage without FHA Insurance and 

3. Single-purpose Reverse Mortgage.

Now let’s learn about them in detail. But if you don’t know about reverse mortgages much then find out what is a reverse mortgage. 

Home Equity Conversion Mortgage

Home Equity Conversion Mortgages or HECMs are one of the most popular and simple reverse mortgages. So, what is HECM?

What are Home Equity Conversion Mortgages (HECMs)? 

HECMs are reverse mortgage loans that convert home equity to loans for borrowers. They are federal government-insured reverse mortgages backed by the HUD. However, any qualified lender can offer them if you fulfill all the requirements. 

Home Equity Conversion Mortgage is the safest form of the reverse mortgage. Because they are nonrecourse. Moreover, a borrower has the option to get the fund as a lump sum, monthly payment, or line of credit. 

But HECMs come with some strict requirements. 

Requirements

1. The borrower has to be a US citizen aged 62 or older and a primary resident of the property.
2. Applicants have already paid the home mortgage or have paid a substantial amount of it. 
3. The borrower has to be free from any federal debt. 
4. The Applicant must be able to pay property tax, maintenance, homeowner’s insurance, and other costs. 
5. A borrower must initiate reverse mortgage counseling with a HUD-approved mortgage Counselor before applying. 

Now let’s talk about the advantages and disadvantages of HECMs.

Advantages 

• As they are federal government insured so they are the safest. 
• HECMs are nonrecourse loans. So, borrowers do not owe more than their home’s value. 
• HECM eligibility does not include credit score. 
• Homeowners can have fixed or adjustable interest rates. 

Disadvantages 

• The requirements are pretty strict. 
• Getting a HECM can be costly. As there are a lot of fees involved. 
• If you break any requirement during the reverse mortgage loan period then you have to pay the loan amount immediately. 
• HECM mortgage insurance premiums are costly. 

Most Suitable For

Home Equity Conversion Mortgages are suitable for any retiree who has fewer retirement savings and assets. So, HECMs can be a great source of a non-taxable income stream.  It is also suitable for people who are unable to pay their remaining mortgage amount. 

However, people with severe health conditions should not apply for HECM. As HECM might affect Medicaid. On the other hand, they might lose reverse mortgage eligibility if they are hospitalized for more than 6 months. 

Proprietary Reverse Mortgage

Proprietary Reverse Mortgages are a type of private reverse mortgage loan. So, they are flexible in terms of requirements but not properly regulated. 

What are Proprietary Reverse Mortgages?

Proprietary Reverse Mortgages are quite similar to HECMs. As they also turn your home equity into a lump sum and give you are loan. 

However, Proprietary Reverse Mortgages are private and not federal government insured. So, they are not as secure. Moreover, they are recourse debt. So, you might need to pay a higher price than your home’s worth if you plan to sell the house or your heir plan to keep the house after you pass away. 

But the requirements are less strict. 

Requirements

1. The borrower must be aged 62 or older and a primary resident of the property.
2. The applicant must have high equity in their home. 
3. The borrower has to continue paying property tax, maintenance costs, homeowner’s insurance, and other costs. 

However, requirements might vary from lender to lender. 

Advantages 

• Applicants get a much higher payout than HECMs. 
• Flexible requirements. 
• Mortgage insurance premiums are not required. 

Disadvantages 

• Not regulated. 
• Not insured. 
• Most of the lenders only provide the payout in a lump sum. 
• High-interest rate. 
• A recourse debt. 
• Higher closing costs.

Most Suitable For

Proprietary Reverse Mortgages are most suitable for people who need a lump sum, do not plan to sell the house, or give it to an heir. 

Even though Proprietary Reverse Mortgages provide a higher payout and have flexible requirements. But they can come with many strings attached. So, please consult with a reverse mortgage counselor if you plan to get one. 

Single-Purpose Reverse Mortgage

Single-Purpose Reverse Mortgages are completely different than HECMs and Proprietary Reverse Mortgages. Most of the time they are offered by urban development non-profits, and state or local governments. 

What are Single-Purpose Reverse Mortgages?

Single-Purpose Reverse Mortgages provide loans for a single purpose in return for less equity in the house. These loans are not offered by regular lenders instead they are offered by non-profit and local governments. 

The purpose of Single-Purpose Reverse Mortgages is completely different than other reverse mortgages. Because these loans restrict the borrower from using the fund in other sectors than the mentioned purpose. So, retirees can not use it as a regular source of income. 

They can be both insured or uninsured. 

Requirements

1. The borrower must be at least 62 and a primary resident of the property.
2. The applicant must mention the valid specific purpose of the loan. 
3. The borrower has to continue paying property tax, maintenance costs, homeowner’s insurance, and other costs. 

The requirements can be different depending on the state or non-profit. 

Advantages 

• Fewer requirements. 
• Less closing costs. 
• Easy to get. 
• Goal focused. 
• Low-interest rate. 

Disadvantages 

• Less funds. 
• Limited use of funds. 

Most Suitable For

Single-Purpose Reverse Mortgages are not designed to provide financial security to retired people. So, it is for people who need a large amount for the home repair cost, repay debt, or mortgage.   

Single-Purpose Reverse Mortgages are great loans for specific financial goals. So, if you are trying to achieve a specific goal but don’t want to lose a large amount of your home equity then Single-Purpose Reverse Mortgages can be for you. 

These are the three types of reverse mortgages. Now let’s have a look at some frequently asked questions. 

What Is The Most Commonly Used Reverse Mortgage?

The most commonly used reverse mortgage is the Home Equity Conversion Mortgage.  

As it is insured by the Federal Housing Administration (FHA). So, most people try to get it for safety. 

Moreover, HECM is more flexible in terms of payment forms. Because it offers a lump sum, a line of credit, or monthly payments. On the other hand, the loan should only be repaid, with interest, when the borrower no longer lives in the home.

Who Owns The House In A Reverse Mortgage? 

The borrower or the homeowner retains ownership of the house in a reverse mortgage. 

If the borrower continues to live in the home and is responsible for paying property taxes, insurance, and maintaining the home. The lender by law can not take possession of the home instead the lender has a lien on the property. 

So, when the borrower no longer lives in the home, whether due to death, health condition, moving, or failure to pay property taxes and insurance, the loan becomes due and the lender has the right to sell the property in order to retrieve the loaned amount.

Find out how reverse mortgage works for heirs. 

In Summary

Among the 3 reverse mortgage loans HECMs and Proprietary Reverse Mortgages are designed as a long-term stable income stream for struggling retirees. On the other hand, Single-Purpose Reverse Mortgages are for short-term needs or goals. 

However, before getting any of these 3 types of reverse mortgages please go through reverse mortgage counseling. It can save you from a lot of trouble. 

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