Many seniors and their financial advisors know that they can use a reverse mortgage to take cash from their home’s equity while still living there. But most don’t realize they can also use a reverse mortgage to buy a house. Whether you are looking to downsize your current home or are becoming a homeowner for the first time, buying with a reverse mortgage offers some attractive benefits, including no monthly mortgage payment. You would, of course, still need to pay property taxes and hazard insurance and meet all loan requirements.
Here’s what else you need to know.
What Is a Home Equity Conversion Mortgage (HECM) for Purchase?
The Federal Housing Administration (FHA) announced the home equity conversion mortgage (HECM) for purchase program in 2008 to allow qualifying seniors 62 or older to use FHA-insured reverse mortgage loan proceeds to purchase a new primary residence.
A HECM for purchase offers all the benefits and borrower protections of a reverse mortgage. Instead of paying all cash or taking out a traditional mortgage, you finance part of the purchase price using a reverse mortgage. With this approach, you have no monthly mortgage principal and interest payments, and you don’t have to repay the loan proceeds and accrued interest until you move out, sell the home, pass away, or fail to uphold the terms of the loan.
How to Buy a New Home with a Reverse Mortgage
The reverse for purchase requires a down payment calculated according to the purchase price and the borrower’s age. It’s typically between 45% and 62% of the purchase price.
“Because they don’t require monthly mortgage payments and don’t have to be repaid until the mortgagee leaves the home or the borrower defaults, they require the homeowner to have a lot more equity in the property to protect the lender as the principal increases,” says Khari Washington, a real estate broker and owner of 1st United Realty & Mortgage.
Most seniors who are selling one home and buying another with a reverse mortgage fund the down payment with home sale proceeds. You can also use savings.
Qualifications for a HECM for Purchase
HECM for purchase qualifications are the same as those for reverse mortgages. You must:
- Be at least 62 years old
- Be current on any debts owed to the federal government
- Live in the home as your principal residence
- Be financially able to pay property taxes, homeowners’ insurance, HOA fees if applicable, and other associated homeownership costs
- Participate in a consumer information session with an approved HECM counselor
Pros of a HECM for Purchase
There are several advantages of a reverse mortgage for purchase, including:
- If you’re selling one home to buy another with a reverse for purchase, you pay one set of closing costs rather than two.
- There’s no monthly mortgage principal and interest payment, which allows you to preserve more of your savings.
- You can get more home for your money, possibly allowing you to afford upgrades or purchase a more expensive home.
- It can help improve your quality of life by moving to a smaller home, closer to family, or relocating to a preferred neighborhood.
“I helped a woman purchase a great home within walking distance of stores and restaurants that she wouldn’t have been able to purchase otherwise,” says Joshua Ezell, designated broker and owner of Breakthrough Real Estate & Property Management, LLC.
Cons of a HECM for Purchase
While FHA guidelines make this a lower-risk option for qualifying seniors, it’s not a good fit for everyone. The most notable downside is that you could be diminishing your heirs’ inheritance. After the loan is paid back when you leave the home, there will be less money in your estate than if you owned the home outright.
In general, reverse mortgages have higher interest rates and closing costs than traditional mortgages. However, when weighing the two options, many people find the benefit of no monthly mortgage payments outweighs the difference in interest rates.
In addition, not all homes qualify for this type of financing. “For example, some manufactured homes and cooperative units don’t meet the minimum requirements of the program,” says Andrew Latham, a certified personal finance counselor and managing editor of SuperMoney.com.
It’s worth enlisting the help of a financial professional to help you weigh the pros and cons of any loan before making a decision.
How to Apply for a HECM for Purchase
The reverse for purchase application process is similar to most mortgage applications, except you’ll work with an FHA-approved HECM lender. Because of that, your current financial institution might not be your reverse-for-purchase lender.
In addition, you will meet with a counselor from an independent, HUD-approved housing counseling agency to ensure you understand what makes a reverse mortgage different. (Some proprietary lenders require this counseling as well.)
In addition to doing a credit check and establishing that you can continue to afford your home’s insurance and upkeep, the lender will conduct a financial assessment to make sure you don’t have delinquent federal debt. It will also appraise your home and do a title search before approving your application. And you will have to provide income verification, including Social Security, pension income, investments, 401Ks, IRA, etc.
Become Educated about HECM for Purchase Loans
You can learn more about FHA HECM loans for seniors through the Consumer Financial Protection Bureau, the National Reverse Mortgage Lenders Association, and the U.S. Department of Housing and Urban Development.
This article is intended for general informational and educational purposes only, and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.