What Is a Single-Purpose Reverse Mortgage?

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DEFINITION

A single-purpose reverse mortgage is a type of reverse mortgage loan that can help a lower-income senior homeowner cover a specific, lender-approved expense.

Definition and Example of a Single-Purpose Reverse Mortgage

A single-purpose reverse mortgage is a type of reverse mortgage loan where the lender specifies that the loan’s proceeds can be used for only one approved purpose (such as paying property taxes or making home improvements).

This type of loan can be hard to find because single-purpose reverse mortgages are only offered by some state and local governments and select nonprofit organizations. Further, eligibility is often limited to homeowners who meet certain income limits.

For example, say you’re a senior homeowner with limited retirement savings and you need help making your property tax payments. If your local government offers single-purpose reverse mortgages, you could apply and request to use the funds strictly for your property taxes. If approved, you would receive the loan proceeds and would only be able to use them to pay for your property taxes—no other expenses.

How Single-Purpose Reverse Mortgages Work

If you want to get a single-purpose reverse mortgage, find out if they’re available from a government entity or nonprofit organization near you. To qualify, you’ll need to:

  • Be at least age 62
  • Own a home
  • Identify a qualifying expense
  • Meet the lender’s eligibility requirements (which can vary)

A good place to start your search for a single-purpose reverse mortgage is your local Area Agency on Aging (AAA). A representative can help connect you with the right organization, if one exists in your area.

A single-purpose reverse mortgage often is the least expensive type of reverse mortgage because it only accesses a small amount of your equity—the amount necessary to cover a single type of expense. For example, if you owe $3,500 in annual property taxes, that amount could be made available to you each year through a single-purpose reverse mortgage. In contrast, a Home Equity Conversion Mortgage (HECM) bases your available loan amount largely on your home’s appraised value and your age.

Similarly to other types of reverse mortgages, you won’t have to make regular repayments on a single-purpose reverse mortgage. Instead, the lender must be repaid when the last surviving borrower sells the home, passes away, or moves to another primary residence. However, as you receive money, your outstanding balance grows and interest is added to it each month.

Alternatives to a Single-Purpose Reverse Mortgage

There are several reasons a single-purpose reverse mortgage might not be the best fit for you. You may:

  • Not be able to find one in your area
  • Have too much income to qualify
  • Want access to a larger loan amount
  • Want more freedom to use the funds

If any of the above applies to you, consider other types of reverse mortgages.

HECMs

HECMs are a type of reverse mortgage backed by the U.S. Department of Housing and Urban Development (HUD). They are easier to find than single-purpose reverse mortgages and the funds can be used however you want. You can also choose from a variety of payment options, including a single disbursement, a line of credit, fixed monthly cash advances, or a combination of these options.

The amount you can borrow with an HECM is based on your age, your home’s appraised value, current interest rates, and more. However, your loan amount will be capped by HUD’s maximum loan limit, which is $970,800 in 2022.

HUD requires that anyone who wants to get an HECM receives counseling from an approved counseling agency to ensure they understand the costs and benefits of reverse mortgages, along with potential alternatives.

Proprietary Reverse Mortgages

People with high-value homes and little or no outstanding mortgages might consider a proprietary reverse mortgage, which isn’t subject to HUD’s maximum loan limit of $970,800. Also known as a jumbo reverse mortgage, this loan enables you to borrow more than an HECM in one lump sum. However, it may come with a higher interest rate than an HECM.

Single-Purpose Reverse Mortgage vs. Proprietary Reverse Mortgage vs. HECM

  Single-Purpose Reverse Mortgage Proprietary Reverse Mortgage HECM
Loan amount Smaller amount to cover single approved purpose No set limit (varies by lender) Up to the home's appraised value or $970,800, whichever is less 
Payment options Varies by lender One lump-sum payment Lump sum, line of credit, monthly cash advances, or a combination
Income requirements Low to moderate income (varies by lender) Varies by lender Must be able to cover ongoing property charges
Loan use Single use, such as home repairs or property taxes No restrictions No restrictions
Lenders Local and state governments, nonprofit organizations Private companies HUD-approved HECM lenders
Cost Lowest cost Often higher interest rates but fewer fees than HECMs Moderate interest rates, high fees (initial and annual mortgage insurance premiums, closing costs, origination fee, servicing fees)
Repayment When last borrower dies, moves, or sells the home When last borrower dies, moves, or sells the home When last borrower dies, moves, or sells the home

Pros and Cons of a Single-Purpose Reverse Mortgage

Pros
  • Can help you cover an expense

  • Lowest-cost reverse mortgage

  • Low-income homeowners may qualify

Cons
  • Hard to find

  • Come with use restrictions

  • Smaller loan amounts

Pros Explained

  • Can help you cover an expense: The loan funds can be used to help you cover an expense such as your property taxes or home repairs.
  • Lowest-cost reverse mortgage: Typically, single-purpose reverse mortgages are the lowest-cost reverse mortgage option.
  • Low-income homeowners may qualify: Lenders often require you to earn less than a certain income threshold to qualify for this type of reverse mortgage.

Cons Explained

  • Hard to find: Single-purpose reverse mortgages can be more difficult to find than the alternatives.
  • Come with use restrictions: You can only use the funds for a specific purpose, which may be too restricting for some borrowers.
  • Smaller loan amounts: Most people won’t be able to tap into all of their equity with this type of reverse mortgage, as the loan amount is limited to the funds necessary for a single purpose.

Key Takeaways

  • Single-purpose reverse mortgages are reverse mortgages designed to help lower-income seniors cover one specific, lender-approved expense.
  • They are offered by some nonprofit organizations as well as local and state governments in select areas.
  • If you want to tap into more of your home equity and use it for multiple purposes, an HECM may be a better fit.
  • If you want to borrow more than $970,800, you may need to look into jumbo reverse mortgages from private lenders.

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Article Sources

  1. Federal Trade Commission. “Reverse Mortgages.”

  2. U.S. Department of Housing and Urban Development. “How the HECM Program Works.”