Using a Reverse Mortgage to Purchase a Home
HECM for Purchase Program
The HECM (Home Equity Conversion Mortgage) for purchase is a Federal Housing Administration (FHA) insured home financing program designed specifically for homebuyers who are age 62 and older. This loan has been created to help seniors purchase a new or resale home, and live in that home free of mortgage payments. Please keep in mind that the homeowner must still maintain the home, and stay current with property taxes, homeowners insurance and HOA fees if applicable.
How does it work?
With a HECM for purchase you can purchase a home by combining a one-time investment of your own funds (down payment) with loan proceeds from a Home Equity Conversion Mortgage (HECM).
With a HECM for purchase there are no monthly mortgage payments, which can give you added cash flow to use however you wish. You own the home as long as you live in it. The loan does not have to be repaid until you sell the home or no longer live there as your primary residence.
Why would I want this?
Seniors utilize the HECM for purchase for multiple reasons. Perhaps you want to move to a home that’s closer to family, or in a more adult active community. Maybe you have your eye on a more expensive home, but didn’t think you could afford it.
Here’s a hypothetical example: Let’s say you currently own your home free-and-clear, and you want to “downsize” to a smaller home. Also as part of this example you are 75 years of age and you have a “non-borrowing spouse”. The price of the home you want to purchase is $200,000 and you are selling your current home for $300,000.
Paying all cash: You could use the money from the sale of your home to pay all cash for the new home; after paying realtor fees and other closing costs this would leave you with about $76,000 and no monthly mortgage payment.
HECM for Purchase: You could use a HECM for Purchase and secure the home with approximately $90,600 leaving you with $185,400, and you would still have no monthly mortgage payments. (As with any mortgage, you would still be responsible for paying property taxes, homeowners insurance, HOA fees and maintain the home in order for the loan to remain in good standing.) The extra funds could be used for anything you like including increasing your retirement income.
Please keep in mind that this example is for illustrative purposes only. Closing costs for the HECM for Purchase may include an origination fee, third-party closing costs, and a FHA Mortgage Insurance Premium.
What kind of home can you buy?
Single-family homes, townhomes, and FHA-approved condominiums are eligible as long as you use the home as a primary residence.
Sources of Down Payment
Proceeds from the sale of your previous home, and savings are the most common ways for borrowers to meet the down payment requirement for a HECM for Purchase.
Here are some of the acceptable sources of funding under the Federal Housing Administration, which is the insurer for the loan.
- Cash from the sale of your prior home
- Withdrawal from a savings, checking account or retirement fund
- Some forms of gift funds including gifts from family members, employers, a charity or government organization with an interest in home ownership initiatives, or a close friend who has a documented interest in the borrower.
The Federal Housing Administration defines all acceptable sources on its website.
You many not use funds from these sources:
- Sweat equity
- Rent credit
- Cash or equivalent from someone benefiting from the reverse mortgage transaction.
- Credit card cash advances
What do you need in order to qualify?
You need to meet the down payment requirement — which typically ranges from 48% to 58% of the purchase price — and prove adequate income to assure the lender that you can meet your obligations to pay for property taxes, homeowners insurance, HOA fees if applicable and maintenance of the home. For the down payment, the money must come from assets you already own, and not from another loan. Typically, people use funds from the sale of their current home; money from a checking or deposit account; or another investment.*
* Subject to certain restrictions.
Other requirements are the same as a regular HECM which include:
- The minimum age is 62 years old.
- Non-Borrowing spouse under age 62 is allowed.
- The home must be the borrower’s primary residence.
- The borrower must be able to pay the home’s property taxes, homeowner’s insurance premiums, homeowner’s association dues if applicable and any other ongoing property costs.
- The borrower must have no delinquent federal debt.
Please use our Contact Us form if you are interested in learning more about the HECM for Purchase program.
If you are a realtor and want to know more about the HECM for Purchase program for your clients, please use our Contact Us form and we will be happy to meet with you.