What Is a Jumbo Reverse Mortgage?
Jumbo reverse mortgages are loans that exceed the maximum amount allowed under the Home Equity Conversion Mortgage (HECM) program offered by the U.S. Department of Housing & Urban Development's (HUD). They’re also known as private or proprietary reverse mortgages, as they’re not regulated by HUD, and therefore don’t have standard fees or terms.
Lenders of jumbo reverse mortgages have cap limits of up to three million dollars, versus the HECM’s maximum of $636,150 (as of January 2017). Other than this, the requirements for a jumbo reverse mortgage are much the same as for a standard one, although fees and terms will also vary from the government-insured options.
Why Aren't Jumbo Reverse Mortgages Covered by FHA?
Jumbo reverse mortgages aren’t covered by the FHA in order to reduce governmental risk. The Reverse Mortgage Stabilization Act of 2013 was passed so that HECM loans wouldn’t experience the predicted high level of default, and help seniors make responsible choices that preserved sufficient funds over the life of the loan.
It also limited the amount that FHA-insured borrowers could access during the first year of their mortgage to 60%, unless it was to be used to pay off a mandatory debt, such as a first mortgage. On the one hand, this guaranteed that borrowers could pay property taxes and home insurance, but it also made government-backed reverse mortgages a much less flexible debt instrument for cash-strapped homeowners.
Pros of a Reverse Mortgage
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Immediate access to cash - HECM-backed reverse mortgages offer a variety of payout options, such as monthly disbursements or a line of credit, but even if the borrower asks for a lump sum payment for their traditional reverse mortgage, if the mandatory obligations are less than 60% of the principal limit, he’ll be given only the difference between the aforesaid obligations and 60% of the principal’s limit. A jumbo reverse mortgage, on the other hand, is almost always paid in a one-time lump sum (some lenders do offer lines of credit), and the amount is significantly higher than with a government-backed one, especially since the cap limit is much higher.
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Access more home equity for larger loan proceeds - The cap limit difference in jumbo reverse mortgages can be very helpful for seniors who have a particularly large amount of equity tied up in their high-value homes, whether because they own a luxury property, or are in an expensive housing market. HECM-backed reverse mortgage caps often only pay out 30-50% of the home’s value.
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No counseling - An HECM-backed reverse mortgage makes prospective borrowers undergo counseling prior to even applying, but jumbo reverse mortgage lender have no such requirements.
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No FHA insurance premium - Jumbo reverse mortgage lenders don’t require their borrowers to pay an upfront mortgage insurance premium when the loan is originated, or pay any ongoing premiums through the term of the loan.
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Reduce estate taxes - The full value of the property is subject to estate tax, but a reverse mortgage against the home, in reducing its value, lowers the applicable estate taxes. This can be a relief for heirs upon the sale of the house, and if you’ve also purchased life insurance, then the policy is paid out in tax-free dollars.
Cons of a Reverse Mortgage
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For refinancing only - Jumbo reverse mortgages cannot be used to buy a property, only to refinance a home you already own.
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Higher interest rate and fees - Interest rates for jumbo reverse mortgages tend to be approximately 2.5% higher than on government-backed loans. For homes valued over one million dollars, two home appraisals may be required, increasing the borrower’s fees.
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Stricter financial assessment - Jumbo reverse mortgages are not as common as traditional ones. Lenders are, understandably, more wary about providing loans that aren’t backed by a government agency. Therefore, their financial health requirements are significantly higher than for an HECM reverse mortgage, taking into consideration the borrower’s income, assets, and credit score to make sure that ongoing monthly housing expenses such as property taxes and homeowners insurance will be covered after the loan closes.
When Is a Reverse Mortgage, Jumbo or Otherwise, a Good Idea?
Senior citizens with a high-value home and a pressing need for cash may find that a jumbo reverse mortgage can offer them options that an HECM-backed mortgage may not. Medical bills, in-home care, the purchase of an investment property, and making a home senior-friendly are all excellent reasons for considering a jumbo reverse mortgage as opposed to a traditional one.
Whatever the reason behind taking out a reverse mortgage, homeowners should take the time to do thorough research into the different lenders, in order to obtain the best deal. An excellent place to being that research is in our list of top reverse mortgage lenders, all of which can offer multiple options.