Reverse Mortgage for Purchase
You may have heard how a Reverse Mortgage can help you afford to remain in your existing home as you age.
What you may not be aware of, however, is that there is also a similar product that can help you purchase a new home while lowering your cost of living—perhaps one that is close to relatives or more conducive to aging-in-place (one-story, walk-in/roll-in showers, etc.). The new home could even cost considerably more than your current home.
Best of all, transaction costs are lower than the traditional expenses of selling one home and purchasing another. And you’ll never have to make a mortgage payment again.
It’s called a Home Equity Conversion Mortgage (HECM) for Purchase Loan—though it’s generally referred to as a Reverse Mortgage for Purchase or a Forward Mortgage.
It’s not a new program. In fact, it was actually approved by the FHA in January 2009. Recent changes to the program, however, have awoken this “sleeping giant” of the senior real estate market making it more widely available than ever before.
How Does a Reverse Mortgage for Purchase Work?
Simply put, a Reverse Mortgage for Purchase will allow you to use the equity from the sale of your current residence to buy a new home (even new construction) and get a reverse mortgage on the new home in one convenient transaction.
As a result, there is no need to wait after buying a home to get a reverse mortgage loan on your new home. As both transactions are done simultaneously, the fees associated with obtaining a new mortgage are also considerably lower.
What’s more, because you don’t have to pay for the new home with 100% cash, you can actually buy more home than you might otherwise be able to, walk away with cash in your pocket and never make another mortgage payment.
Regardless of how long you live in the home or what happens to your home’s value, you’ll only have made the one, initial investment (down payment) along with closing costs, property taxes and mortgage insurance premiums towards the purchase. To ensure you recoup your initial closing costs, however, you should plan on living in the new home for at least 5 years.
As a reverse mortgage purchase loans fall into the category of no recourse loans, the lender can only sell the property to recover their investment, but they can never seize any other funds from you or your estate. Should real estate prices increase, all of the new equity belongs to you and/or your heirs.
Although there is no specific date on which the HECM for Purchase loan is due, the loan would mature and be payable when:
- The last remaining borrower or non-borrowing spouse passes away or leaves the home to live somewhere else for more than 12 consecutive months
- The home is sold
- You do not meet the borrower obligations of maintaining payment of property taxes, homeowners insurance, homeowner’s association fees, basic home repairs or you fail to comply with other loan terms
According to Rob Cooper, national director of strategic partners for Reverse Mortgage Funding, “This is not just a mortgage product. It’s a financial, cash-flow tool for retirees. It gives them more purchasing power if they don’t want to drain all their assets. It also gives them the luxury to get a better lot, to add all the upgrades they want and to still have no mortgage payment.”
What’s an Example of a Reverse Purchase Loan?
The website for All Reverse Mortgage, gives an example of “a couple who wanted desperately to be closer to their family. The home they bought was a newer home, single level home that made their lives more simple than the 2-story home they sold and left.
“They had almost $450,000 in cash after the sale of their previous home, but there was no way they could purchase in the area they wanted for that amount and so they thought they would have to choose between a condominium and a mortgage and they did not feel they would qualify for the mortgage (and the thought of the condominium was not sitting well with them at all) . . .
“Even though their [new] home was over the HUD lending limit of $625,500, they were still able to buy the home with about $355,000 of their own cash and the reverse mortgage put the rest down, costs included. They put the rest of the money in the bank . . .”
What Are the Requirements for a Reverse Purchase Loan?
Reverse purchase loans are much like reverse mortgages. They aren’t for everyone—but they just may be right for you. In fact, they were specifically designed for seniors whose net worth is tied up in the homes they already own.
The requirements for a Reverse Purchase Loan are pretty much the same as the eligibility requirements of a Reverse Mortgage:
- The home must be the borrower’s primary residence.
- The borrower(s) must:
- Be 62 years or older
- Own the property outright or have a considerable amount of equity in it
- Meet financial eligibility criteria as established by HUD
- Complete a HUD-approved counseling session
- Be able to pay the new home’s property taxes, insurance premiums, homeowners association dues, and any other ongoing property costs
- Have no delinquent federal debt
- The difference between the purchase price of the new home and the HECM loan proceeds must be paid in cash from qualifying sources such as the sale of a prior residence, home buyer’s other assets or savings
- The new property must be a:
- A single-family home o 2-to-4 unit owner-occupied dwelling
- FHA approved condo
- A manufactured home that meets FHA requirements
- Primary residence occupied within 60 days of loan closing
How Much Money Can I Get?
Like a Reverse Mortgage, the amount of money you may receive under HECM for Purchase depends on:
- The age of the youngest titleholder
- Current interest rates
- The home’s appraised value
- The initial mortgage insurance premiums
But please be aware that the funds available to you may be restricted for the first 12 months after loan closing, due to HECM requirements. In addition, you may need to set aside additional funds from loan proceeds to pay for taxes and insurance.
According to Jack Guttentag, Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania, “The only disadvantage is that the reverse mortgage will cover only about 50-60 percent of the house price, depending on the borrower’s age, requiring the purchaser to find the remaining needed cash elsewhere. The most common source is asset liquidation.” That, of course, would be the sale of the first house.
Both fixed-rate and adjustable rate products are available. And, like any loan, the prices of identical transactions can differ materially from one lender to another so you’ll want to shop around for the best deal.
If you want to purchase a house with a HECM and have no concern regarding the amount of home equity you leave to your heirs, you’ll want to look for the largest cash draw.
If you do have a concern for what your heirs will inherit, you’ll want to see both cash draws and projections of future loan balances.
Websites such as The Mortgage Professor can help you compare rates, determine cash draws, see projections of future loan balances and decide which is the best option for you.
Much like a reverse mortgage, a reverse mortgage for purchase can help allow you to age in place in your own home. Best of all, it can even be a new home that’s closer to family or more age-friendly. Again, much like a reverse mortgage, do your due diligence before you sign any papers or risk any assets along the gray mile.