Single-Purpose Reverse Mortgages: What You Need To Know

As a homeowner, you have certain responsibilities, including maintaining your home and paying your property taxes and homeowners insurance. But even with a 401(k), IRA and Social Security, retirement income isn’t always enough to cover all of these expenses. For some seniors, a single-purpose reverse mortgage can help.

Among the three different types of reverse mortgages, the single-purpose reverse mortgage is the least common. In fact, it’s only offered in some states and by some government agencies and nonprofits. Like many lenders, Rocket Mortgage® does not offer this type of reverse mortgage.

Because this type of reverse mortgage is uncommon, many people don’t even know it exists, let alone what it is and how to use it. Read on to learn more about this loan and where you may be able to apply for one. 

Single-purpose reverse mortgages allow homeowners aged 62 or older to borrow against their home equity to fund a single, lender-approved purpose, such as paying property taxes or performing maintenance on the home. Typically, this is the least expensive type of reverse mortgage to take out, largely because it’s backed by government agencies and non-profit organizations.

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

The most important thing to remember about a single-purpose reverse mortgage is included in its name. You can only use your proceeds for one thing – and it must be approved by your lender. This is one of the biggest differences between this type of reverse mortgage and the home equity conversion mortgage (HECM) and proprietary reverse mortgage, which both allow you to use your proceeds however you like.

A reverse mortgage isn’t for everyone. Before you apply, it’s important to weigh the pros and cons of this loan, especially while considering how you want to use it.

The Pros

The proceeds are tax-free. Because this money is a loan that will eventually be paid back, the proceeds from a single-purpose reverse mortgage are tax-free. These types of loans don’t usually affect Social Security or Medicare benefits, either, but it’s best to talk to a financial advisor to learn more.

It’s easier for some to qualify. Many people with a low or moderate income can qualify for these loans, while they may not qualify for the HECM or proprietary reverse mortgage.

No monthly payments are required. Reverse mortgages come due when the borrower sells the home, moves out of the home, passes away. It can also come due when the borrower fails to stay current on their property taxes or homeowners insurance or doesn’t maintain the home. As long as the loan doesn’t come due and you continue to pay your taxes and insurance and maintain the home, you’re not required to make a monthly payment on the loan. This can provide you more money each month for other expenses.

The Cons

Some fees are possible. While single-purpose reverse mortgages tend to be less expensive than other reverse mortgage loans, they may still come with fees, like closing costs. The lender will also charge interest on the loan.

There’s restricted use of proceeds. The biggest drawback of this type of reverse mortgage is that you can only use your proceeds for one purpose and the lender must approve it. That means you likely won’t be able to use it for living expenses, travel or medical costs. Typically, lenders approve these loans for such uses as paying property taxes or insurance premiums or making improvements to the home.

They’re not available everywhere. Single-purpose reverse mortgages aren’t offered in every state. They are typically offered by state and local governments or non-profit organizations along with some credit unions.

Depending on where you live, finding a single-purpose reverse mortgage lender may be more difficult, but not necessarily impossible. It just may require more work. While looking for a lender for your single-purpose reverse mortgage, it’s important to compare information from different lenders and be on the lookout for anything that makes you feel uneasy, like hidden fees or high-pressure sales tactics.

The Federal Trade Commission (FTC) Consumer Information site recommends contacting your local Area Agency on Aging to learn more about programs in your area. You can find agencies near you with the Administration for Community Living’s Eldercare Locator or by calling 1-800-677-1116. When you contact your agency, make sure to mention that you’re interested in learning more about a single-purpose reverse mortgage, loan for home improvements or property tax deferral program. 

If you’re unable to get a single-purpose reverse mortgage in your state or want to explore other loan options, consider researching the HECM and proprietary reverse mortgages to see if they may be a better fit for your situation. You could also consider a home equity line of credit or home equity loan, which also allow you to borrow against the equity in your home. 

A single-purpose reverse mortgage allows you to borrow from the equity in your home and use that money for a one purpose that must be approved by your lender. While they can be helpful for many seniors, including those with middle to low incomes, these loans aren’t available everywhere and may be too limiting for your goals. You may need to consider other reverse mortgage programs or home equity loans or look into refinance programs for seniors as well.