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:
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:
Pros and Cons of HECM reverse mortgage to purchase?
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: