What Is a Single-Purpose Reverse Mortgage?

Homeowners can tap into their equity and receive monthly payouts when they want to retire. Reverse mortgages make this possible and don’t require a credit score or income. A single-purpose reverse mortgage is one of the available options. It’s slightly different from a traditional reverse mortgage but easier to qualify. This guide will explore what to expect from a single-purpose reverse mortgage.

What Is a Single-Purpose Reverse Mortgage?

A single-purpose reverse mortgage requires you to spend the money a certain way. Before your application is approved, you and the lender agree on how the proceeds from this financial product can be used.

For instance, a single-purpose reverse mortgage may be exclusively for home improvements. Under this agreement, you can use the proceeds for home improvements. However, you cannot use this same windfall to take vacation, pay taxes, or do anything else.

Single-Purpose Reverse Mortgage Vs. Other Types of Reverse Mortgages

Single-purpose reverse mortgages are different from the other types of reverse mortgages. Here’s how they compare.

Home Equity Conversion Mortgages (HECMs)

Home equity conversion mortgages can cover everyday expenses and are more suitable for people who want to retire. You can’t live off a single-purpose reverse mortgage, but it is typically easier to qualify for compared to HECMs. Home equity conversion mortgages are more readily available in the market, but you’ll have to see if a state, local, or nonprofit agency offers one.

Proprietary Reverse Mortgages

Proprietary reverse mortgages offer monthly or lump sum payments for any expense. These financial products also get around some limitations imposed on HECMs, such as the upper limit on how much you can borrow. Single-purpose reverse mortgages are more restrictive but have better rates and lower fees. Proprietary reverse mortgages are more expensive.

Note to Patton: Link to https://www.benzinga.com/money/prorpietary-reverse-mortgage

Pros and Cons of Single-Purpose Reverse Mortgages

These are some advantages and disadvantages to consider before getting a single-purpose reverse mortgage.

Pros

Single-purpose reverse mortgages offer the following advantages for homeowners.

• Less expensive: Single-purpose reverse mortgages tend to have lower interest rates and fewer fees than HECMs.
• You don’t pay taxes on the distributions: Since you receive funds that you pay back later, distributions from single-purpose reverse mortgages are not taxable.
• Low-income borrowers can qualify: Qualifying for single-purpose reverse mortgages is easier than other financial products.

Cons

While these financial products offer several advantages, these are some notable disadvantages to remember.

• They’re hard to find: Not as many lenders offer single-purpose reverse mortgages compared to HECMs.
• You’re limited in how you can use the funds: You and the lender must agree on how the funds will be used. Other loans give you more flexibility. 
• You lose home equity: Any reverse mortgage reduces your home equity. You will either have to pay it back or give less home equity to your heirs. Some people run out of home equity and outlive their reverse mortgage payouts.

How Much Does a Single-Purpose Reverse Mortgage Cost?

The cost of a single-purpose reverse mortgage varies for each person. It’s more affordable than other reverse mortgages, but you still have to consider the following expenses:

• Interest
• Closing costs
• Fees 

You’ll also have to compare rates and terms offered by state, local, and nonprofit agencies. 

How to Qualify for a Single-Purpose Reverse Mortgage 

To qualify for most reverse mortgages, you’ll have to be 62 years or older and have a home with at least 50% equity. Homeowners can only take out reverse mortgages for their primary residences. Real estate investors can use this financial product for their main home but cannot take out reverse mortgages for their investment properties. To remain eligible, you must keep your home in good condition and keep up with property taxes.

How to Find Single-Purpose Reverse Mortgages

It’s a bit harder to find these financial products compared to others. Homeowners looking for single-purpose reverse mortgages should contact their local Area Agency on Aging to learn about their options. Individuals can use the Eldercare Locator to contact your agency and request more information about single-purpose reverse mortgages in your area.

Compare the Best Reverse Mortgage Lenders From Benzinga’s Top Loan Providers

It’s a good idea to compare rates and terms from various lenders before choosing a financial product. These are some of the best reverse mortgage lenders to consider.

Alternatives to Single-Purpose Reverse Mortgages

While a single-purpose reverse mortgage is a viable financial product to consider, you have additional ways to tap into home equity. These are some of the top options.

• Home Equity Loan: These loans have fixed monthly payments spread across 5 to 30-year terms. Homeowners receive a lump sum immediately but need a 620 FICO score or higher to qualify. You must also fulfill the mortgage lender’s DTI ratio requirement.
• Home Equity Line of Credit: These lines of credit have variable interest rates, but you only pay interest when you borrow against the credit line. You must fulfill credit and income requirements to qualify for this financial product. Borrowers can make interest-only payments during the draw period, lasting up to 10 years. The remaining balance gets converted into an installment loan with a term of 20 years.

Deciding If a Single-Purpose Reverse Mortgage Is Right for You

A single-purpose reverse mortgage is a more affordable type of reverse mortgage that can help with a specific expense. These financial products have fewer requirements, but you will have to do additional research to find entities offering this loan. Homeowners should assess their financial situations, home equity, and other factors before deciding if this reverse mortgage makes sense.

Frequently Asked Questions