What are Proprietary/Jumbo Reverse Mortgages?
The federally insured Home Equity Conversion Mortgage (“HECM”) has been the dominant reverse mortgage product for the last three decades. That is changing, however, as innovative mortgage lenders have found that certain restrictive HECM guidelines have opened the door for non-agency reverse mortgage products (known as “jumbo” or “proprietary” reverse mortgages).
These jumbo reverse mortgage options still maintain many of the consumer protections of the HECM program. Reverse mortgages, FHA-insured or not, must all be non-recourse loans. However, these proprietary products do not charge mortgage insurance premiums (“MIP”) – neither the initial MIP (2%) nor annual MIP (0.5%). So while the rates may be slightly higher, you might find the upfront charges to be significantly reduced.
For the last few years the phrase “jumbo reverse mortgage” was used to describe these options as lenders were able to better serve borrowers who owned higher-priced homes. With the FHA HECM, the maximum claim amount is capped, currently for 2021 at $822,375. This means that a HECM borrower with a home valued above that amount can only borrow a portion up to the FHA limit. The jumbo reverse products have principal limits (loan amounts) that can go up as high as $6 million, on home values up to $10 million, making these loans highly attractive for higher-priced homes.
A jumbo reverse mortgage is a private or proprietary loan which means the loans terms, conditions and guarantees are established by the lender versus the typical FHA-insured reverse mortgage which is administered by HUD. In addition to no MIP, today’s jumbo reverse mortgages are available with very low closing costs, even lower than closing costs for the refinance of a traditional home loan. Some jumbo reverse programs have closing costs as low as the cost of counseling - $125.
These jumbo products also solve other problems that HECMs currently do not. Here are a few:
- HECMs require condominium units to be FHA-approved before they can be eligible for HECM financing. Proprietary products may finance units within condos that are not FHA-approved.
- HECM loan have initial disbursement limits that often prevent borrowers from accessing more than 60% of their principal limit within the first year. Proprietary products have no such restrictions.
- HECMs require all existing liens to be paid off at closing. Proprietary product may allow the reverse mortgage to be in second lien position.
- HECMs do not currently allow the payoff of unsecured debt at closing. Proprietary products may allow the payoff of personal debt and other items at closing.
- HECMs require most liens to be seasoned for 12 months before closing. Proprietary products may have relaxed seasoning requirements.
- HECMs require all borrowers to be age 62 or older. Proprietary products may offer financing for borrowers as young as 55-years-old.
Some are offered as first liens. Some are structured with a growing line of credit that mimics the HECM ARM. Still others as noted above can remain in a second lien position in cases where the first mortgage has an attractive low rate.
Not all proprietary reverse mortgage products are the same. They each offer various features that may appeal to different homeowners. If interested, make sure to inquire about state availability and the specific counseling requirements. These new products must be approved in every state where the product will be offered, and no lender has nationwide coverage for their proprietary products.