Seniors who are interested in buying a home need to consider the HECM reverse mortgage purchase program. If you are over the age of 62, you can buy a home with less than 40% down payment, and NEVER have to make a monthly mortgage payment. We can show you strategies that protect your cash while allowing you to buy that dream home or downsize.
Many potential reverse mortgage for purchase candidates have never heard of the program to begin with. Financial advisers, real estate agents, and even forward mortgage brokers don’t have the knowledge about this financing option. This program is not for cash-poor seniors. Instead many savvy seniors are using this program to allow them to purchase a home while also having 50% of their money liquid (to invest/save/spend). Honestly the program sounds too good to be true but every single day smart seniors are using it to buy their homes.
Typical methods of buying a home for those over the age of 62:
Paying all cash. Using all of your funds from selling your previous home and or business to buy a new home can lead to financial trouble in the later stages of retirement. Longevity needs to be a factor in your mind – what if you live until X years of age (figure 1-3 decades from now). That is a very long time to make a financial plan for, but having cash to invest helps. Using all of your money from the previous sale of an asset to buy a new asset that can increase and or decrease is risky. There are other investment opportunities that have less risk involved such as investing in annuities that can provide lifetime income sources with very little to no risk at all. The strategy would be that the other 50% of the homes value could be invested into an asset that is guaranteed to grow and or provide a certain amount of income for the rest of your life. You will NOT have to make a mortgage payment, and no matter what happens to your homes value the lenders cannot foreclosure on your property (you maintain paying taxes and insurance as usual). The only issue with a HECM for purchase is if heirs are involved and if home values decrease dramatically when it’s time for them to inherit the home but this would be an issue even without a reverse mortgage on the property.
Using a forward mortgage to buy a home:
While not as popular, younger seniors give this consideration since they have the credit scores and smaller down payment needed to qualify (20% down). With longevity in mind, a senior in their 60’s should NOT have to worry about making a mortgage payment for the next 15-30 years. We believe it is important to have a comfortable retirement and by utilizing a HECM for purchase you make a larger commitment to buy the home upfront (larger down payment) BUT less risk of owning a home that can as easily decrease in value since the remainder is the reverse mortgage. If value plummets, you are protected since there won’t be any risk of foreclosures, and you DO NOT have a payment to make. That extra monthly income or leftover money can substantially increase your retirement lifestyle which is often overlooked.
Reverse Mortgage Purchase Calculator | Calculate Down Payments to Buying a Home with a Reverse Mortgage Loan
Factors involved in calculating how much you will have to put down are your age and the property sale price (property appraised value).
We know that the mortgage payments will be $0, so that is easy enough.
Interest rates. We take care of this factor by comparing at least 4 of the top 10 lenders that we have a partnership with. By comparing multiple HECM for purchase lenders, we can guarantee that you will get the lowest interest rate on buying through a reverse loan which is crucial. This is the #1 overlooked aspect of getting a reverse loan, and we take it very seriously in finding you the most competitive HECM quotes.
Some examples. A $400,000 home being bought with a traditional mortgage at 50% down payment ($200K down) would result in a principal and interest payment of roughly $950 a month for 30 years. This is almost $12,000 a year in payments or lost retirement income that could have been saved/invested/spent on lifestyle. Over the course of the loan, you will have paid $144,000 in interest alone. This is almost what you put down to buy the house with the mortgage to begin with.
Compared to putting down the same amount of money $200,000, but having the remainder financed through the Home Equity Conversion Program for Purchasing a home. The #1 benefit is not having an obligatory payments. Should you want to make a payment, you can. Should real estate prices increase, all of the new equity belongs to you and or your heirs. It is important to note that you will own the home, live in the home as your primary residence, never have to pay a mortgage payment, but you are responsible for (maintenance, taxes, and insurance).
While the reverse mortgage loan will accrue interest (banks need to make money off the loan), your home value should continue to increase offsetting any interest built up. This is also true with the above example with a forward mortgage as well assuming home prices keep at a 4% a year annual growth. Home prices won’t only go higher so if you are concerned about potentially going into care facility as you age or leaving substantial amounts of equity to your heirs getting a forward mortgage might be the better option if you can afford the payments. With the HECM for buying the interest on the loan will accrue and if the home values does not increase at the same rate you will owe more and more as the years go by.
Getting a reverse mortgage to buy a home in October 2014 is a very smart move since interest rates are incredibly low. There are talks of financial assessment, and that could make it tougher to qualify with income and credit being checked. What other programs will allow you to put down less than 50% of the home’s value and never pay another mortgage payment.
Should you be interested in knowing more or getting a free quote, please fill out the form on this page so we can help with the next steps. Our company has the technology to compare purchase mortgage through the HECM reverse mortgage program. Our partner banks have been doing purchase HECM’s for years now, and we have all of the top lenders as business partners. All questions can be answered and quotes given for free to consumers over the age of 62.
How to buy a home using a reverse mortgage
While most reverse mortgages are obtained to enable homeowners to remain in their houses, there is also a program that allows seniors to use a reverse mortgage to buy a new principal residence.
Known as an HECM for Purchase, this program allows seniors to buy a new house and obtain a reverse mortgage on it within the same transaction. Because it’s a single transaction, there is only one set of closing costs the borrower must pay.
The program was introduced in 2009 by the Federal Housing Administration (FHA) to enable older citizens to buy homes they otherwise couldn’t because they would not qualify for traditional mortgages.
Why use an HECM for Purchase loan
The intent of the program is to help seniors move when the need arises and still have the option of benefiting from the reverse mortgage. You do not have to sell your existing home before applying for an HECM for Purchase loan, but the lender will assess whether you can financially handle owning two properties.
Although it’s not required to have a specific reason for moving, seniors often use this program in situations where they want/need to move because:
- They want/need to be closer to family members who can assist in their care.
- Their health dictates that they can no longer live well in their current home (e.g. they live in a two-story home and can no longer safely climb stairs).
- They no longer need a large home and want to downsize.
- They wish to live in a warmer climate.
- They want to use the proceeds from selling their existing home as a down payment to buy a more expensive home without making monthly payments.
How the program works
The HECM for Purchase program works in much the same way as a standard reverse mortgage. For both types of loans, the homeowner does not make monthly payments to repay the loan. Instead, the loan is repaid, with interest, when the property is sold, refinanced, or when the homeowner moves out of the house. But as with a standard reverse mortgage, the homeowner is responsible for taxes, insurance, and upkeep for the life of the loan.
The eligibility requirements for both the borrower and the property to be purchased are similar. Homeowners must be at least age 62; the older the borrower, the more money they can borrow.
The property being loaned against must be the borrower’s primary residence, and must meet FHA standards. You can not use an HECM for Purchase loan to fund the construction of a new house, but you can apply for a loan once a newly built home is completed and has been issued a certificate of occupancy.
Substantial down payment required
One of the main differences is that an HECM for Purchase loan requires a down payment, whereas a standard reverse mortgage does not. A conventional reverse mortgage allows you to borrow against the equity you have already built up. But in an HECM for Purchase loan, you have no equity to borrow against because you don’t own the property.
The minimum down payment required will be based on the sales price, the age of the borrower(s) and the expected interest rate. The typical user of this type of loan will need to pay around half of the purchase price as a downpayment.
Also, you cannot borrow the money used to cover the downpayment; it must come from your assets, the sale of your other house, or a gift from a family member.
The equity generated by the downpayment is used to calculate the reverse mortgage loan amount. The reverse mortgage funds cover the remaining cost of the home, just like with a traditional mortgage.
For example, say you want to buy a $200,000 home, and have $125,000 for a downpayment. You can then obtain a reverse mortgage for the remaining $75,000. Instead of making monthly payments on that $75,000 balance like you would with a conventional mortgage, the reverse mortgage allows you to defer payments until the loan matures. Just as with a standard reverse mortgage, this occurs when you pass away or move out of the home.
Is it possible to use a reverse mortgage loan to purchase a property? Yes.
HECM for purchase as the industry calls the program or a reverse mortgage purchase loan allows qualified seniors to buy a home for retirement without having a monthly mortgage payment.
This loan type is growing in popularity as it allows for seniors over the age of 62 to buy a home with 40% downpayment (the reverse mortgage will finance the remaining 60%) and there is no obligatory mortgage payment. IF you are doing well and wish to pay a mortgage payment, you can, BUT most do not and put the funds to better use.
What does one need to qualify for an HECM purchase?
Qualifications that apply for a traditional HECM and also down payment apply:
- 40% cash down payment
- Provable income and good credit scores
- No delinquencies on any federal back loans/debt
- The property must meet FHA guidelines (manufactured homes can qualify)
- Primary residences only (no investment/vacation properties)
- 62 or older
Pros and Cons of HECM reverse mortgage to purchase?
- 40% down payment
- No mortgage payment ever
- Interest rates are at an all-time low
- Easy to qualify vs. a traditional mortgage (designed for seniors)
- Still a loan with fees/costs long term
- 40% down payment can be a lot for some
Reverse Mortgage Purchase Lenders:
ALL HUD approved lenders are licensed to also lend out purchase loans. Read our article on the origination fees; we can save you $6,000 by using the Click Quote Save free comparison service.
FAQ on purchasing your retirement home with a reverse mortgage:
- Is it a good idea to use an HECM purchase to buy a home in retirement?
- Are there alternatives to an HECM purchase? Yes, you can always buy the property 100% cash. You could also use financing through your family/friends. If you are downsizing buying cash is a realistic option or even getting a traditional forward mortgage. Cash is king, and if you can buy your home while still keeping the money, this can make financial sense for many who wish to invest or save the cash for later use.
- What are the negatives on the HECM purchase?
- What are the fees for an HECM purchase loan? Besides, from paying the fees to do the reverse mortgage loan, you will still be responsible for the property upkeep along with taxes/insurance. Normally fees for a reverse mortgage are higher than a traditional mortgage loan, but if you are getting your quote from one of our approved lenders we may be able to keep the costs in line with a traditional refi or way below the market rates. Click Quote Save is a free comparison shopping service for seniors, and we have usually save seniors thousands compared to going through the process alone.
- What happens when I want to sell the house? As with any other reverse mortgage loan you maintain ownership of the property and thus are in full control when you can sell/move. The loan would become due and payable.
- Can I use the HECM purchase for a construction loan? No, sorry.
- Who should avoid using this program? This loan type is not recommended for short-term financing.
- Can I pass the property down to my heirs or estate? Yes, any equity left in the property can be left to your heirs/estate.
- Will the bank own the home? No, This is your home now and later on when it comes time to sell and reap any of the up-side.