Most seniors take out a reverse mortgage to help them stay in their existing home as they get older, but did you know to use a reverse mortgage to finance a new home?
The HECM for Purchase
In the early 1980s, a new loan product called a reverse mortgage was approved to be insured by the Federal Housing Administration (FHA). This government-insured home equity loan, specifically called a Home Equity Conversion Mortgage (HECM), commonly referred to as a “reverse mortgage” was developed exclusively for seniors, and signed into law in 1988. The financial tool became one of the only methods that allowed senior homeowners access to a portion of their equity without leaving their homes or adding to their monthly expenses.
In 2008, the loan evolved to include a new variation that allowed senior homeowners the same advantages of the traditional HECM reverse mortgage but added the option of purchasing a new home. Congress created the Home Equity Conversion Mortgage (HECM) for Purchase to streamline home-buying transactions and cut costs. Before, seniors would buy a new home, incurring closing costs, and then take out a reverse mortgage on the new house, triggering new closing costs. The HECM for Purchase rolls this into one transaction and one set of closing costs.
How Does It Work?
With the HECM for Purchase reverse mortgage, the borrower provides a down payment using the sale of the previous home or other savings. The equity earned through the down payment and the new home’s value is used to calculate the reverse mortgage loan amount. All or part of the reverse mortgage funds then covers the remaining cost of the house, just like with a traditional mortgage.
The benefit to financing with a reverse mortgage is that instead of paying the loan back every month over time like a traditional mortgage, reverse mortgage repayment is deferred to when the loan matures. This way, senior borrowers on a fixed income can finance the purchase of a new home without the burden of having to make monthly mortgage payments. Borrowers are responsible for paying property taxes, homeowner’s insurance, and home maintenance. Borrowers can also receive money from your home equity which is usually tax-free, can help bridge the Medicare gap between age 62 and 65, delay Social Security payments to increase monthly income, pay for long-term care expenses, and more.
As with a traditional HECM, a homeowner must be 62 or older to qualify for the federally insured HECM for Purchase. The person must also be the owner of their new home and have equity in the property. The applicant’s home must be their primary residence (live in the house at least 6+ months per year). Property must also be a single-family home, 2- to 4-unit dwelling, or FHA-approved condo. There are no credit score requirements, but some income and credit qualifications apply to ensure you can pay taxes and insurance.
Types of Properties Eligible
According to the U.S. Department of Housing and Urban Development (HUD), single-family homes and existing properties with four units or less are typically eligible for a HECM for Purchase, according to the U.S. Department of Housing and Urban Development (HUD). Cooperative units, newly constructed residences where the appropriate local authority has not issued a Certificate of Occupancy or its equivalent, boarding houses, bed and breakfast establishments, existing manufactured homes built before June 15, 1976; and
existing manufactured homes built after June 15, 1976, that fail to conform to the Manufactured Home Construction Safety Standards, and/or lack a permanent foundation as required in HUD’s Permanent Foundations for Manufactured Housing Guide or homes that are installed or were occupied previously at another site or location do not qualify.
With most reverse mortgages, you have the right of “rescission,” which means you have three business days after closing to cancel the deal for whatever reason, without penalty. To cancel, send your letter by certified mail and ask for a return receipt so that you have documentation of when you sent and when the lender received your cancellation notice. Keep all copies of any communications between you and your lender. After you cancel, the lender has 20 days to return any money you’ve paid for the financing of the reverse mortgage loan. If you believe there is a reason to cancel the loan after three days, contact us to help see if you have the right to cancel.
Sources: Wall Street Journal, Consumer Financial Protection Bureau, Fairway Independent Mortgage Corporation, AAG