Single-purpose reverse mortgages: What you need to know

Older homeowners often have plenty of home equity, which gives them a lot of flexibility when it comes to financing major expenses. A single-purpose reverse mortgage allows older homeowners to borrow their equity to pay specific expenses, such as home maintenance or property taxes, that allow them to stay in their home.

Rocket Mortgage^® does not offer reverse mortgages, but will explain what they are so you understand all your borrowing options.

What is a single-purpose reverse mortgage?

A single-purpose reverse mortgage allows older homeowners – typically 62 and older – to borrow their home equity and use the money for a specific purpose. Common uses for single-purpose reverse mortgages include home repairs, maintenance, and paying property taxes.

Single-purpose reverse mortgages usually are offered by state and local governments or nonprofit organizations and are not federally insured. The requirements and terms vary by lender and location. These loans may not be available in all areas and may be offered only to homeowners with low to moderate income.

Single-purpose reverse mortgage vs. other types of reverse mortgages

Single-purpose reverse mortgages are the least common type of reverse mortgage. The more common types are home equity conversion mortgages and proprietary reverse mortgages.

• HECMs: These loans are insured by the Federal Housing Administration and available only to homeowners 62 and older. They help turn home equity into cash and do not require the borrower to make monthly payments. The loan is repaid when the borrower no longer lives in the home, often by selling the house.
• Proprietary reverse mortgage: These are private loans typically offered to homeowners with higher-value properties. They are similar to an HECM but may lack the protections that come with FHA backing.

Both loan types are more flexible than a single-purpose reverse mortgage. In general, you can use the money from these loans for any purpose. A single-purpose reverse mortgage only lets you use the money for a single lender-approved reason.

Pros and cons of a single-purpose reverse loan

Before you apply for a single-purpose reverse loan, consider the pros and cons.

Pros

Some benefits of single-purpose reverse mortgages include:

• The loan doesn’t count as income. The money you borrow with a single-purpose reverse mortgage doesn’t count as income for tax purposes. It also won’t affect benefits that have income limits.
• It’s easier for some to qualify. Many people who might struggle to get other types of loans due to their income or credit can be eligible for these loans, even when compared to other reverse mortgages.
• No monthly payments are required. So long as you live in the home and pay your home insurance and tax bills, you don’t have to make payments on the loan. Instead, you pay it back when you sell the home, choose to move out, or otherwise no longer live in it as your primary residence.

Cons

Drawbacks to single-purpose reverse mortgages include:

• You’ll have to pay fees. Though these loans don’t require payments, many lenders will charge fees, such as closing costs. For example, you may pay a few thousand dollars in origination fees. Interest also will accrue on the loan.
• There’s restricted use of proceeds. You can only use the proceeds from a single-purpose reverse mortgage for the purpose approved by the lender.
• They’re not available everywhere. These loans are not available in every state, and they can be uncommon even where they are allowed.

How to find a single-purpose reverse mortgage lender

Single-purpose reverse mortgages are typically offered by state or local governments and nonprofit organizations. Since single-purpose loans are the least common type of reverse mortgage and are not insured by the federal government like an HECM, it may be challenging to find a lender that offers them in your area.

Check with your state or local housing finance agency, or search online for single-purpose reverse mortgage lenders in your area. The National Council of State Housing Agencies provides a list.

If possible, compare terms from a few lenders to be sure you’re getting the best deal on your loan.

Alternative loan options

If a single-purpose reverse mortgage doesn’t seem like the right fit, consider these other options.

• HECMs. This type of reverse mortgage is much more widely available. It also has fewer restrictions on how you can use the borrowed money. However, qualifying may be more challenging, and costs may be higher. Rocket Mortgage does not currently offer HECMs.
• Home equity loans. These loans let you borrow your home equity, and you can use the money for almost any purpose. Most home equity loans have fixed interest rates and monthly payments, which you must make until you pay off the balance.
• Home equity line of credit. A HELOC lets you borrow against your home equity as a line of credit, which you can draw from as needed. You can use the borrowed money for any purpose you like. HELOCs often have variable interest rates, so payments can fluctuate. Rocket Mortgage does not currently offer HELOCs.

The bottom line

A single-purpose reverse mortgage allows you to borrow your equity to use for a specific, lender-approved purpose. These restrictions make the loans easier to qualify for and cheaper than other reverse mortgages, but they are offered by fewer lenders and may not be available in all states.

If you’re an older homeowner and are looking for options that will let you turn your home equity into cash, or you want to reduce your housing costs, consider exploring your borrowing options with Rocket Mortgage.