Can the Borrower Use a Reverse Mortgage to Purchase a Second Home?
A reverse mortgage is a type of loan that allows homeowners who are at least 62 years old to borrow against their home equity and receive cash or a line of credit. Unlike a regular mortgage, they don’t have to make monthly payments until they move out, sell the house, or die. The loan balance grows over time, while the home equity decreases.
A reverse mortgage can be a useful way to supplement retirement income, eliminate monthly mortgage payments, and stay in the home for as long as possible. But can the borrower use a reverse mortgage to purchase a second home or an investment property?
The Short Answer: No
The short answer is no, not anymore. Prior to the financial crisis, some lenders did offer a private product that allowed borrowers to obtain a reverse mortgage on their second home. But today, most reverse mortgages are through the Federal Housing Administration’s home equity conversion mortgage (HECM) program, which only allows for a reverse mortgage on a primary residence(reverse.mortgage).
A requirement of the reverse mortgage is that borrowers must maintain the home as their primary residence. This means they must live in the home for more than half of the year and not be away for more than 12 consecutive months. If they fail to meet this requirement, they could default on the loan and face foreclosure(reverse.mortgage)(bankrate.com).
The Long Answer: Maybe
The long answer is maybe, depending on how the borrower uses the proceeds from the reverse mortgage. While they cannot take out a reverse mortgage directly on a second home or an investment property, they can use the cash or line of credit they receive from a reverse mortgage on their primary residence to purchase another property(reverse.mortgage)(reverse.org).
For example, if a borrower has paid off their primary home and wants to buy a vacation home in another state, they could take out a reverse mortgage on their primary home and use the money to make a down payment or pay cash for the second home. They would still have to meet the occupancy requirements for their primary home and make payments on their second home(reverse.org).
Alternatively, if a borrower wants to buy an investment property to generate rental income, they could use the proceeds from a reverse mortgage on their primary home to finance the purchase. They would have to pay taxes and expenses on both properties and comply with the occupancy rules for their primary home(reverse.org).
The Caveat: Be Careful
Using a reverse mortgage to purchase a second home or an investment property can be a risky strategy. Reverse mortgages can be expensive and complicated, and they can reduce the borrower’s home equity and inheritance. They also come with various fees and interest charges that can add up over time(bankrate.com)(bankrate.com).
Moreover, buying another property can increase the borrower’s financial obligations and responsibilities. They would have to pay for property taxes, homeowners insurance, maintenance, repairs, utilities, and any HOA fees on both properties. They would also have to deal with potential issues such as vacancies, tenants, repairs, taxes, and legal matters if they rent out their investment property(reverse.org)(bankrate.com).
Therefore, before using a reverse mortgage to purchase another property, borrowers should consult with a qualified financial planner and a HUD-approved HECM counselor who can help them understand the pros and cons of this type of loan and explore other alternatives.
A reverse mortgage can be a helpful tool for some homeowners who need more cash in retirement and want to stay in their home. However, it cannot be used directly to purchase a second home or an investment property. Borrowers can use the proceeds from a reverse mortgage on their primary residence to buy another property, but they should be careful about the costs and risks involved.