Purchasing a Home with a "HECM" Reverse MortgageUsing a reverse mortgage to help seniors buy a house works exactly the same way a reverse mortgage works when you are refinancing a home in which you currently live. The difference is that you are doing the reverse mortgage on the home you are purchasing, not on the home you are selling. The combination of your down payment, and the reverse mortgage on your new home, will equal the purchase price.
HECM Mortgage Specialist
NMLS # 9752 Equal Housing Lender NMLS #1169
How Seniors Can Take Advantage of Buying a Home with HECM (FHA-Insured Reverse Mortgage)
A reverse mortgage "HECM" purchase offers many advantages to seniors who want to buy a house. The following unique guidelines will outline how seniors can buy a home with an HECM (most commonly known as a “reverse mortgage”) when they may not have qualified under the guidelines for conventional loan programs.
Just like any other mortgage program, there are specific requirements that must be met when seniors want to buy a home with an HECM loan. The difference with a reverse mortgage purchase is that determining if the borrower will meet these requirements can usually be determined prior to loan contract; and therefore all parties can enter the buy-sell process knowing that it is unlikely that the loan will fall through in the eleventh-hour.
While the process of listing your current home to sell, and contracting to purchase a new home are virtually the same, seniors using a reverse mortgage to buy that house can provide a very different outcome. Following is a recap of how using an HECM loan (reverse mortgage) to buy a home can be a much more practical and beneficial option for seniors:
Qualifying for the reverse mortgage involves very limited credit requirements, and employment, income or net worth are not considered.
The amount of mortgage funds available is based on the borrower’s age, the purchase price of the home, and the current interest rate, not on a preset loan-to-value.
Historically, the interest rate on an HECM loan for seniors wanting to buy a house is more favorable than other types of mortgages.
Based on their available down payment, the borrower may qualify for a larger mortgage than is needed, in which case a smaller down payment would be leave the home buyer with a larger retirement nest-egg. Or, they can opt to make a larger down payment than is required, and then use the remaining reverse mortgage funds as an open line of credit to be used at their discretion in the years following the closing.
The homeowners will never be required to make monthly mortgage payments as long as they reside in the home and keep property taxes current and the home insured.
There is no term on the loan. By statute, the reverse mortgage does not expire until the 150th birthday of the youngest borrower. They have the option to pay down or pay the loan in full at any time with no pre-payment penalty.
This is a non-recourse loan. Regardless of the future payoff on the loan, the homeowner or their heirs cannot be held liable for any loan balance beyond the value of the home at the time the loan is being repaid; however, any profits from the future sale belong to the homeowner or their heirs.
The reverse mortgage purchase program provides seniors who want to buy a house with an option that can overcome some of the usual hurdles. The challenges of qualification are minimal:
Credit is a very minor consideration.
Credit scores are not a factor.
Borrowers are not limited by their income or net worth.
The senior will be able to buy a more substantial house with the same down payment, or they may be able to buy a house they want while retaining a portion of the proceeds from the sale of their current home.
In all cases, there is never a monthly principle or interest payment, and home buyers will only be required to keep their properties taxes paid and the home insured.
With no requirement to make mortgage payments, as long as one of the original borrowers occupies the home, regardless of their future financial status or income, regardless of fluctuations in home values or financial market, there is no risk of losing their home.
There may be many reasons why senior homeowners want to sell their current home and buy a different house, however often the reasons fall into four categories:
The seniors would prefer to buy a house with fewer stairs and with less maintenance and upkeep, perhaps a single level or ranch style home in a maintenance free community;
Following the departure of their children or the death of a spouse their current home is too large and the upkeep is too difficult;
The home buyer would like to relocate closer to family, friends, or the essential services that are important to them as they age;
They may find that a different climate is more suitable for them.
While the seniors’ reasons to sell their home and buy a different house may be obvious, how to facilitate that transition can be challenging. Some of the most obvious considerations include:
Will the profit from the sale of the seniors’ current home be adequate to pay cash for the house they wish to buy; or perhaps they need to retain some of the cash from their sale to help supplement their retirement income leaving insufficient funds for the purchase?
Will they qualify for a traditional mortgage, and even if they will, are they willing to devote monthly resources to make mortgage payments?
If they cannot pay cash for a home, or cannot qualify for or are not willing to obtain a traditional mortgage, should they settle for a new home that falls short of their needs, or should they simply stay in their current home despite the issues this home presents as they age?
The factors that determine how much home a senior can buy using a HECM loan are the same factors used in calculating the loan for a reverse mortgage refinance:
Using the dates of birth of the borrowers.
The purchase price of the home.
The current interest rate.
After subtracting the loan amount from the purchase price, the amount of the borrower’s down payment is determined.
Pre-qualifying the senior to buy a home using a HECM can be accomplished in two ways:
The first option is used when the seniors have identified a house they would like to buy, and need to know exactly how much of a down payment will be required.
The second approach is when the client has determined the maximum amount of funds they are willing or able to use for a down payment, and they would like the lender to calculate the maximum sales price of homes for which they should be shopping.
In both cases, by providing the reverse mortgage lender with the names and dates of birth of the borrowers, plus, either the purchase price or the funds available for down payment, within minutes the lender can provide exact calculations as to the options available for the borrower.
The pre-qualification of the borrower is quite precise, and the only variable that will change this outcome will be a change in the interest rate prior to closing. Since the interest rate affects the size of the loan, if the rate increases before the loan is able to be locked, the amount of the loan would be less, and, therefore, the down payment would increase.
Although reverse mortgage rates are historically more stable than forward mortgage rates, to avoid any surprises a lender should pre-qualify the borrower based on a rate higher than the current rate just to make sure they will have sufficient funds to close.
History of the HECM Loan
In the first 20 years following the passage of the legislation that first established the FHA-insured reverse mortgage program (HECM LOAN), nearly half a million senior homeowners enhanced the quality of their lives by using a reverse mortgage to refinance the homes in which they lived.
Two decades later, as part of the Home Equity Recovery Act of 2008 (HERA), Congress amended Section 255 of the Community Homeownership and Development Act to allow seniors to buy a home using an HECM (FHA-insured reverse mortgage).
Approximately 81% of the nation’s nearly 40 million seniors own their home; recent estimates confirm the amount of equity in those homes exceeds $3 trillion.
When you consider these factors alongside the ever-increasing life expectancy rate of Americans, it is simple to conclude that tens of millions of seniors will be considering the sale or their current home and buying a house that will be more suitable for them to live out their retirement years. Given these facts, the opportunity for seniors to buy a house utilizing a reverse mortgage is fast becoming one of the most important financial tools of the day.
Example: John age 70 and Mary age 69 had considered listing their current home for sale. They had consulted with a Realtor® who provided them with enough information to know that the likely outcome from the sale of their home would be net proceeds of approximately $135,000 – obviously, their fixed income would not allow for much of a mortgage payment. At this point, John and Mary were not too hopeful that they could afford to move.
While out driving one day they discovered a nice patio home community. They decided to stop and take a look at the models. What they found was a home that included all the features they would like in their next home. The sales price of the home was $285,000 which would require them to qualify for, and make payments on, a $150,000 mortgage. Since this was out of the question, they left a bit discouraged.
They called the Realtor® who had previously evaluated their home, and she suggested they talk with a reverse mortgage lender to see if they could possible buy a home using an HECM. The idea of purchasing a home with a reverse mortgage was something they had never heard of, but the home was perfect for them and they wanted to see if there were any possible options.
They contacted the reverse mortgage lender, and based on the borrowers’ dates of birth, the purchase price of the patio home, and the current interest rate, within minutes the reverse lender was able to provide the following information:
Based on Mary’s date of birth, a purchase price of $285,000, and a fixed interest rate of 5.06%, the HECM Standard program would provide funds after deducting for all closing cost, in the amount of $173,760. This would then leave a down payment of $111, 240. After closing, the borrowers would be required to pay property taxes and keep the property insured, but they would never be required to make any mortgage payment as long as one borrower was alive and living in the home.
Concerned that they may not be able to sell of their current home for several months, they were worried that a rate increase might cause the down payment to increase beyond what they could afford. To determine if this would be a problem, the lender increased the qualifying interest rate by half a point to 5.56 and recalculated the loan. At the higher rate, the loan amount dropped to $155,520 leaving a down payment of $129,480. Since they would have an estimated $135,000 available for a down payment, their Realtor® was able to write a contract to purchase the patio home, contingent on the sale of their current home, and they immediately listed their home for sale.