When you start researching reverse mortgages, you may hear mostly about the FHA-insured Home Equity Conversion Mortgage, or HECM. That is the program I discuss most often.
But proprietary reverse mortgages deserve attention, too.
A proprietary reverse mortgage is a private, non-FHA loan offered by an individual company. I have completed more proprietary reverse mortgages this year than I believe I have completed in the previous five years combined. That is because these programs can solve situations where an FHA-insured HECM may not work as well.
I have specialized exclusively in reverse mortgages since 2003. My goal is not to push you toward one program. My goal is to help you understand the differences so you can make an informed decision about your Colorado home.
How HECM and Proprietary Reverse Mortgages Are Similar
Before discussing the differences, I want to start with what these programs have in common.
Both types of reverse mortgages generally allow you to borrow against the equity in your home without making required monthly mortgage payments. You remain responsible for meeting the loan’s ongoing property obligations.
In both programs, you generally need to:
- Live in the home as your primary residence.
- Pay your property taxes.
- Maintain homeowners insurance.
- Keep the property in good repair.
- Keep your name on the title.
If you meet those obligations, the loan typically does not become due simply because you continue living in the home.
Both programs are also generally non-recourse. In simple terms, you are not required to repay more than the value of the home when the loan becomes due. Both may also allow a set-aside, where money is reserved so the lender can pay property taxes and insurance on your behalf for a defined period.
That does not mean the programs are identical. The details can be very different.
1. Age Requirements Are Different
The FHA-insured HECM is designed for homeowners age 62 and older.
Many proprietary reverse mortgage programs begin at age 55. That makes a proprietary loan one of the few reverse mortgage options available if you are between 55 and 61.
If you are already 62, you may have a choice between the two programs. If you are younger than 62, a proprietary program may be the only reverse mortgage option available to you.
Age is only one part of the analysis. The age of the youngest homeowner also affects how much you may qualify to receive. Generally, a younger borrower qualifies for a smaller percentage of the home’s value than an older borrower.
2. Proprietary Programs May Provide More Money
The HECM uses a maximum claim amount when calculating the loan. The FHA limit discussed in this episode is $1,249,125. If your home is worth more than that, the HECM calculation does not use the full value above the limit.
A proprietary reverse mortgage does not use that same FHA cap. Depending on the lender and program, the available loan amount may be much higher. Some proprietary programs may provide up to $4 million on a home valued at $10 million.
The difference can matter even if your home is worth less than $1 million.
For example, based on the rough figures I discussed in the episode, a 69-year-old homeowner with an $800,000 home might qualify for approximately $50,000 more through a proprietary program than through a HECM. The actual amount depends on the lender, interest rate, property, age of the youngest borrower, and other factors.
More money is not automatically better. You also need to consider the interest rate, fees, line-of-credit terms, and how long you expect to remain in the home.
3. Initial Access to Funds Can Be Different
The FHA-insured HECM generally limits how much you can receive during the first 12 months. In the situation I discussed on the podcast, the initial disbursement limit was 60% of the available loan amount, except when funds are used to pay off an existing mortgage.
That limit can be frustrating if you need a large amount of money immediately.
I recently worked with homeowners in hospice who wanted access to all of their available funds right away. They wanted to plan for in-home care and, in one situation, make improvements that would make the home easier to live in. Because they owned their homes free and clear, the HECM’s initial disbursement limit would not have met their needs.
The proprietary program allowed access to 100% of the available amount from the beginning.
This is an important distinction if your need is immediate and substantial. It may also matter if you are planning major home improvements, paying for care, or handling another urgent financial situation.
4. Fees and Mortgage Insurance Work Differently
A HECM includes FHA mortgage insurance. The initial mortgage insurance premium is 2% of the home’s value, up to the FHA lending limit. There is also ongoing mortgage insurance charged on the loan balance.
The HECM origination fee is capped at $6,000. Other standard mortgage expenses may include the appraisal, title work, closing fees, recording fees, and related costs.
Proprietary reverse mortgages do not have FHA mortgage insurance. However, their origination fees are set by the individual lender. A typical structure may be up to 5% of the loan amount.
For example, if a proprietary loan provides $400,000 and the lender charges a 5% origination fee, that fee would be $20,000. Some lenders may charge less.
Even with a higher proprietary origination fee, the total closing costs can sometimes be lower because there is no FHA mortgage insurance. You need to compare the complete loan estimate rather than focusing on one fee.
5. Interest Rates Are Usually Higher on Proprietary Loans
The tradeoff for receiving more money or avoiding FHA mortgage insurance may be a higher interest rate.
At the time of the podcast, I described a HECM monthly adjustable rate as roughly 6% to 6.25%. The HECM fixed rate was close to 8%. Proprietary reverse mortgage rates were generally around 9% to 10%.
Rates change, so I do not want you to treat those figures as a quote. The important point is that interest can accumulate faster on a proprietary loan.
For example, interest on $400,000 accrues more quickly at 10% than it does at 6.25%. If you expect to remain in the home for many years, the long-term cost of the higher rate deserves careful consideration.
6. Condos May Be Easier With a Proprietary Program
FHA rules can make condominium financing more complicated.
For a HECM, the condominium complex generally needs FHA approval. There is a process called single-unit approval, but I have found that it can be difficult and paperwork-intensive.
Proprietary lenders may be more flexible with condos that are not FHA-approved. This does not mean every condo will qualify. It means the private lender may have a different review process.
If you own a condominium in the Denver area or elsewhere in Colorado, this may be a major reason to compare both options.
7. Proprietary Loans May Help With Non-Mortgage Debt
Another important difference involves the debts you may be trying to pay off.
With a HECM, the debts paid directly from the proceeds generally need to be connected to the property. Examples include a mortgage, home equity line of credit, or lien against the home.
A proprietary reverse mortgage may allow more flexibility with other debts.
I recently worked with a woman who had approximately $60,000 in credit card debt related to medical bills. Her debt payments affected her ability to qualify for a HECM. With the proprietary program, we were able to pay off three large credit cards, which helped her qualify based on her income.
Every situation is different, but this is one example of why comparing programs matters.
8. Property Values and Lines of Credit Can Affect Your Choice
Some proprietary lenders may reduce the available loan amount if property values decline in a particular area. For example, I discussed a case where a 4% decline in condo values led one proprietary lender to reduce the loan amount by 5%.
Another proprietary lender did not make that reduction.
With an FHA-insured HECM, a decline in local property values does not create the same type of lender-by-lender adjustment to the available loan amount.
The line of credit is another major difference.
A HECM line of credit is guaranteed for the life of the loan, as long as you meet the program requirements. It cannot simply be closed because the home’s value declines.
A proprietary line of credit is often available for approximately 10 years. It may also be closed, similar to a traditional home equity line of credit, if property values drop significantly or the lender’s terms allow it.
If you want a dependable source of funds for future emergencies, that distinction deserves your attention.
Which Program Is Right for You?
My overall view is that the FHA-insured HECM is usually the stronger long-term option when it fits your situation. It generally has lower interest rates, standardized rules, and a line of credit with long-term guarantees.
However, a HECM is not the right answer for everyone.
A proprietary reverse mortgage may make more sense if:
- You are between age 55 and 61.
- Your home is worth substantially more than the FHA lending limit.
- You need access to more funds immediately.
- You own a condo that is not FHA-approved.
- You need to address qualifying non-mortgage debt.
- You are comfortable with a higher interest rate.
- The private program offers terms that better match your specific goal.
I encourage you to compare the programs side by side. My personalized reverse mortgage analysis can help you review estimated proceeds, costs, and payment options based on your situation.
You can also download my Colorado Consumer Guide or review the pros and cons of reverse mortgages.
A reverse mortgage is not for everyone. I will be direct about that. But if you are considering one, I invite you to take your time, ask questions, and compare both HECM and proprietary options before making a decision.
You can start a conversation with me without committing to a loan. I am happy to help you understand what may work best for your Colorado home.
This article is for educational purposes only. Reverse mortgage terms, rates, loan amounts, fees, and eligibility requirements vary by borrower, property, lender, and program. A personalized analysis is necessary before making a decision.
