There are two types of reverse mortgages currently available: the FHA-insured HECM (Home Equity Conversion Mortgage) that is frequently advertised on TV, and a new proprietary loan referred to as a Jumbo Reverse. Jumbos are primarily designed for people who have homes worth over $800,000 or non-FHA-approved condos worth more than $500,000. Jumbos allow homeowners to access more of their wealth than is possible with an FHA product.
The New Jumbo Reverse Mortgage
Jumbo reverse mortgages were substantially improved in March, 2018. Now there are three versions making it more useful as a wealth management tool (for financial planners), as a purchase financing option (for buyers and real estate agents), and for homeowners looking to access and make better use of their house-based wealth. Having three different rate options provides homeowners with a choice between accessing and preserving house-based wealth.
Not everyone is eligible or can qualify for a reverse mortgage. And, sometimes they are not an optimal solution. But when they're suitable, there is nothing else like them. What's important is knowing when they are and aren't appropriate.
If you'd like to see if you qualify, how much you're eligible for, or if a reverse mortgage is your best option, click the Reverse Mortgage Qualifier button below and we will generate a report from our reverse mortgage calculator based on your unique situation.
This article aims to educate you on when a jumbo reverse mortgage is the right choice as well as its pros and cons. I'll also cover key differences between the jumbo reverse and the better-known FHA-insured home equity conversion mortgage, also known as a HECM or reverse mortgage.
The guidelines on the new jumbo reverse mortgage, introduced March 19, 2018, run more than 300 pages. As a financial education platform, the goal at The Reverse Advisor is to provide clarity and direction to help you turn data and facts into knowledge and wisdom. At the end of the day, it's about solving real world problems to help you, your parents, clients or loved ones have a healthy, sustainable, enjoyable lifestyle.
Benefits of Home Equity Conversion Mortgages
People consider reverse mortgages for two reasons: 1) they want to solve income in retirement challenges, and 2) they need access to wealth trapped in their home.
Homeowners who are age 62+ use a reverse mortgage to:
- Eliminate their current mortgage payment
- Make retirement savings last longer
- Protect a spouse after they pass away when their Social Security or pension ends
- Home improvements or modifications
- Age-related expenses
- Delay to maximize Social Security
- The Reverse Purchase Strategy - downsize and increase liquidity
- Reduce capital gains from a premature sale (liquidity trap) and capture the step-up-in-basis*
All reverse mortgages have two additional features: 1) no prepayment penalties or back-end fees, and 2) the fact they are non-recourse loans - meaning if the loan balance is greater than the home's value at the end, the lender bears the loss. It's not the responsibility of the borrower's heirs or estate.
Before the 2008 meltdown, jumbo reverse mortgages were prevalent. Many of the largest lenders offered jumbos and qualifying was easy. All of those jumbo reverse products (and many lenders) disappeared when the asset-backed securities market collapsed during the financial crisis.
Today’s jumbo reverse is not as attractive as those offered before 2009. But last month's changes have gone a long way toward improving the product thus making it more useful as a financial solution.
10 Benefits - Jumbo vs. FHA
- Get more cash on higher value homes; i.e., those worth more than $800k
- The house value is not capped at the FHA lending limit of $679,650
- No mortgage insurance premiums; i.e., no FHA up-front insurance (2% of MCA or house value) and no annual mortgage insurance (0.5% of loan balance)
- No disbursement limits in year one - all loan proceeds available at closing
- Three different fixed-rate options - lower rate if need less money
- Not an adjustable loan - rate never changes
- Condos do not have to be FHA approved
- Can pay off debts to qualify*
- Non-recourse loan - heirs do not owe anything if loan exceeds house value
- Can retain up to 4 financed properties
Main Benefit - More Money
The most important difference between the jumbo reverse and the FHA version is the jumbo offers larger loan amounts, what is called the principal limit. Below you will see several charts which illustrate the differences between the three available fixed-rate options and the amount available with the FHA-insured version.
Caveat and disclaimer: anytime someone publishes rates or provides charts showing rates and maximum loan amounts, the information becomes outdated almost immediately. Don't look at the charts below to determine how much someone at a certain age will be eligible for. After today, the charts will be outdated. For an accurate quote, call or click here.
The charts below show the relative difference between the four options (3 jumbos and the FHA version).
- Jumbo Tier 1 has the lowest: fixed rate and principal limit (borrowing limit), and 0.2% origination fee
- Jumbo Tier 2 has a higher: rate and principal limit, but no origination fee
- Jumbo Tier 3 has the highest: rate and principal limit, and a 1.0% origination fee
There is a considerable difference in maximum loan amounts between the three jumbo loan options. This provides a valuable, real choice to consumers. The right choice depends on how much home equity someone needs to access. If they need less, they can pay less. If they need more, it's available.
Borrowers now can trade-off liquidity (cash now) versus minimizing equity erosion from the negative amortization of a growing loan balance. The higher the rate, the more money available, but the loan balance grows faster too.
To be fair, minimizing equity erosion (choosing the lowest rate) does not necessarily mean preserving or increasing wealth. Someone may want to convert some house-based wealth into cash because they have an opportunity that has a higher potential return - perhaps they're starting a business.
The charts below also show how much more someone can borrow as they get older. Let me take a minute to explain that. Lenders have competing goals: lend as much as possible but be sure to get paid back what was lent. Remember, on a jumbo, if the loan balance exceeds what the house can be sold for, the lender takes the loss, not the borrower or their heirs.
Will Rogers once said...
"I'm not so much concerned with the return on my money as I am the return of my money."
Of course prudent lenders are concerned with both, getting their money back and making a positive return. Lenders have to analyze multiple variables: life expectancy (when cancer is cured, people will live longer), future house values (what if the borrower passes away during a housing recession), future interest rates, etc. Some of these things are unknowable, which makes these loans somewhat risky for end investors.
The riskier any investment, the higher the rate (expected return) tends to be. That explains why the Tier 3 jumbo, with higher loan limits, also has higher rates and fees. Those higher rates and fees offset the elevated risk that the loan balance might be more than the house value at the end, when a maturity event occurs.
FHA reverse mortgages have their own peculiar nuance: the house value used for calculation purposes is the lesser of the: appraised value, purchase price, or National Lending Limit; which today is $679,650. If there are two people the same age, one has a house worth $679,650 and the other has a house worth $2 million; both would get the same amount from an FHA reverse mortgage because FHA ignores value over $679,650.
You can imagine how surprised and unhappy people with high-value homes are upon learning this. They believe they can borrower about half the home’s value. When they find out the FHA loan doesn't work that way, they’re disappointed.
Jumbo reverse mortgages were designed to address this nuance and fill the gap; however, they still don't offer as much money as people expect or would like. Look at the following charts, which show maximum loan amounts as the youngest borrower ages.
House value $600,000 (max claim amount). Notice how the FHA reverse offers more regardless of age, even though it is being compared to a Tier 3 jumbo (the one that gives the most money).*
House value $800,000 (max claim amount). Notice how the Tier 3 jumbo offers more above age 71.*
House value $800,000 (max claim amount). Notice how the FHA reverse offers more than the Tier 1 or Tier 2 jumbo regardless of age.*
House value $1 million (max claim amount). Even at a value of $1 million, the FHA loan is better than the Tier 1 and Tier 2 jumbo between 62-65 years old.*
House value $1.5 million (max claim amount). When values are over about $1.2 million, the jumbo reverse offers more regardless of age.*
There are two reasons jumbo loan amounts are smaller than one might imagine:
- The secondary market is not very liquid; there just aren’t that many institutions offering them - lack of competition among lenders
- They are not insured by the federal government or anyone else - the lender/investor bears all the risk
FHA mortgage insurance, among other things, protects banks if the loan balance at the end is more than the value of the house. Jumbo reverse lenders don’t have that protection because they're not government insured. So, banks are more conservative around how much they’ll lend on a proprietary jumbo reverse.
10 Drawbacks - Jumbo vs. FHA
- Must take entire loan amount up-front at closing (can get exception for less)
- No line of credit option - cannot get more money later
- No monthly income for life option
- Monthly servicing fee of $30, which is added to loan balance
- If more than one appraisal is required, they'll use the lower value
- Seasoning requirements if refinancing an existing reverse mortgage
- Refinances require a closing cost and loan proceeds test
- Non-borrowing spouses do not have the same protections and must complete a video-taped interview acknowledging such
- If borrower doesn't want all the money they're eligible for, they must explain why in writing
- Proceeds can affect certain government benefit programs like Medicaid
Jumbo Reverse Mortgage Purchase
A jumbo reverse mortgage can be used to purchase a home. In fact, a fixed rate is ideal when buying a home with a reverse mortgage because the buyer usually wants the entire principal limit at closing. There is no reason to be subject to future interest rate risk if it doesn't convey a benefit to the borrower.
For a reverse purchase, the buyer makes a large down payment (45-65% of purchase price) and uses a reverse mortgage for the rest. The advantage for the borrower is they don't have to make a monthly principal and interest payment on the reverse mortgage.* They just pay taxes, insurance, maintenance, and HOA if applicable.
The reverse loan balance grows if the borrower doesn't make payments. Then, when the home is eventually sold or refinanced, the lender gets paid back the original principal plus interest and servicing charges. The lender does not get the house. Any remaining equity at the end goes to the borrower or their estate.
The buyer's down payment can also come from gift funds under certain conditions. Acceptable gift funds include:
- Borrower's relative
- Borrower's employer or labor union
- Documented close friend
- Charitable organization
- Governmental agency
On a reverse purchase, no seller contributions, credits, or incentives are allowed. Also, the seller cannot give a credit for incomplete repairs. Sellers are allowed to pay fees like a home warranty or fees required to be paid by seller by local law or as is customary in the subject market.
New construction must have a Certificate of Occupancy prior to closing. All purchase transactions must have an FHA Amendatory Clause and a Real Estate Certification (even though these are not FHA loans).
Non-arm's-length transactions are prohibited (absence of equity or down payment, purchase price does not equal property value, financing unsold builder inventory, etc.) and so are flips under 90 days. Resales between 91-180 days have certain restrictions.
- Primary residence
- Single family residence
- Two-unit (duplex)
- Detached site condos; i.e., no common walls or shared garages do not require FHA approval
- Condo or townhome worth over $500,000; FHA approval not required, but must be warrantable
- There is a 5% reduction in LTV if condo
- Jumbo only available when proceeds exceed FHA max loan amount
- PACE or HERO tax liens or assessments must be paid at closing and cannot be subordinated
- Second homes
- Rental property
- Manufactured homes
- Modular homes
- Three-to-four units
- Boarding houses
- Mixed use
- Bed & breakfast
- More than 20 acres
- Indian leased land
- Co-op or condo-hotel
- Marijuana cultivation
- Deed restrictions around FHA free assumability (even though not an FHA loan)
- Log homes
- Tiny homes
- Other unique homes
- Un-permitted additions
- Second kitchens
There are many non-FHA approved condos in California, Texas, Colorado, and elsewhere. People who have a condo worth $500,000+, who couldn't previously get an FHA reverse mortgage, now have an option to access some of their wealth without selling their home.
You'd be surprised how often we have to tell condo owners they cannot get a reverse mortgage because the FHA approval on their condominium project has expired. Developers go to the trouble to get projects FHA approved initially because it helps them sell units (larger buyer pool), but homeowner associations don't always maintain the approval after the project is turned over to them because it takes time and costs money. The new jumbo reverse mortgage can be a valuable solution.
Warrantable condos mean:
- The project (including all common areas) is fully completed and the common areas are insured
- The homeowner association is controlled by unit owners (not the developer or builder)
- 50% or more of the units are owner-occupied
- No one person owns more than 10% of the units
- Value less than $1.5 million requires 1 appraisal and desk review
- Value over $1.5 million requires 2 appraisals and desk review
- For sale by owner properties require 2 appraisals and desk review
- Value will be lower of appraisal(s) or the desk review
- Lender pays for second appraisal when required
- Maximum loan amount = $4 million; more requires a lender exception
- Property not in CA, that is worth over $3 million, will only get credit for 75% of it's value
- CA property, worth over $5 million; only 75% of the value will be used
Income & Credit Qualification
- Same residual income requirements as FHA - depends on household size
- Some monthly maintenance and utility expense factor ($0.14/sf)
- If debt is paid off to qualify, those accounts must be closed
- Similar rules to FHA
- Allowable exceptions for loss of income due to death or divorce or medical
- Emergency property repairs not covered by insurance by exception are acceptable
- If middle credit score is under 600, there is a mandatory tax and insurance set-aside known as a LESA.
- If LESA required, add 0.25% to interest rate
- Borrower must pick one of the 10 approved jumbo reverse mortgage counseling agencies
- Borrower pays counseling fee, usually around $175, out of pocket, at time of counseling
- Lender cannot accept an application or assess fees until after counseling cool-off period, waiting period varies by state
Please review this article before your counseling phone call: 10 Reverse Mortgage Counseling Facts You Need to Know.
Brokers cannot pay or credit any fees on jumbo reverse mortgages because they are fixed rate loans and fall under certain federal guidelines.
It's been over half a decade since Bank of America, Wells Fargo, Financial Freedom, and MetLife stopped doing reverse mortgages. Of the lenders still originating reverse mortgages, most do not have access to the new proprietary jumbo reverse mortgage. And, to understand how recent FHA rules changes have made the jumbo more popular, check out: New Reverse Mortgage Rules - Better or Worse.
If you have a home worth more than $800,000, or you have a condo worth $500k+, and you haven’t been able to borrow as much as you want, click the Free Reverse Mortgage Qualifier button below.
* Consult your tax advisor
* FHA HECM index: 1-yr Libor, margin: 2.0%; Jumbo Tier 1: 5.99%; Tier 2: 6.5%; Tier 3: 7.0%.
* Rates and Principal Limits subject to change without notice. Not all borrowers will qualify. Charts presented to show relative difference between loan products.
About the Author
Kent Kopen earned his Reverse Mortgage Specialist credential in March 2007. Last year Kent earned the CRMP (Certified Reverse Mortgage Professional) designation. Note, there are less than 150 CRMP designees in the United States. Mr. Kopen also provides education, tools, and strategies to professionals who offer financial and legal advice to others. "Our resources help financial advisors, CPAs, and estate planning attorneys help seniors optimize their home equity to provide greater security and peace of mind."