Purchasing a Home with a “HECM” Reverse Mortgage
Using 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
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
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
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
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.