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Reverse mortgage loans and 2nd homes
Through the Federal Housing Administration, the U.S. Department of Housing and Urban Development offers seniors a way to supplement retirement incomes through its home equity conversion mortgage, commonly called a reverse mortgage loan.
What the heck is a HECM?
A home equity conversion mortgage, or HECM, is FHA’s reverse mortgage loan program, enabling seniors to withdraw some of the equity in their home if they need money.
Instead of making mortgage payments, qualifying senior homeowners get payments from the lender based on their primary home’s equity. (They’re still responsible for taxes, insurance and other expenses.)
In the superheated mortgage environment preceding the Great Recession, a few banks independently experimented with reverse mortgage loans for second homes. That didn’t last long.
“There was a very small proprietary market for those loan products at one time, but they are no longer offered (on second homes),” says Jenny Werwa, spokesperson for the National Reverse Mortgage Lenders Association.
Here’s what to consider about reverse mortgage loans if you own a second home.
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Understand your eligibility
To be eligible for an FHA HECM, you must:
- Be a homeowner 62 years of age or older.
- Own your home outright or have a low mortgage balance that can be paid off at closing with proceeds from the reverse mortgage loan.
- Have the financial resources to pay ongoing property charges, including taxes, insurance and maintenance.
- The home must be your primary residence and you must meet minimal income and credit requirements.
You also are required to get counseling from a HUD-approved counselor to help you understand the costs and different payment options available for the money you receive from the reverse mortgage loan.
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Know which is your primary residence
Legally, your primary or principal residence is the one you live in most of the time.
Usually, if you don’t live in a home on which you have an FHA-insured HECM for 12 consecutive months, the reverse mortgage loan comes due.
Even if you’re a snowbird, living part of the year in one home and part in another, you can have only one primary residence at a time, and only that home can qualify for a reverse mortgage loan.
That said, getting a reverse mortgage on your primary residence can help finance other properties.
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Use income for 2nd-home expenses
Proceeds from a reverse mortgage loan can be used for just about any purpose, including property insurance, taxes, upkeep and the remodeling of vacation homes and investment properties.
This is particularly advantageous for baby boomers, who tend to have a disproportionate amount of their wealth tied up in real estate, says Dan Hultquist, a certified reverse mortgage professional and director of Learning & Development for ReverseVision, a technology provider for the reverse mortgage loan industry.
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Buying another home
Seniors often want to downsize or relocate to be closer to family members, but “the historically traditional approach — selling their home and paying for another one in cash — doesn’t serve the baby boomer generation,” Hultquist says.
A little-used program, called HECM for Purchase, helps seniors buy a different primary home, using a HUD-approved reverse mortgage loan, an option that Hultquist calls “a great way to relocate.”
The homeowner can apply a portion of the proceeds from the sale of the old primary residence toward the cost of the new one. Then, “rather than getting cash payments, the reverse mortgage applies the available funds toward the remaining amount of the sale price and closing costs,” Hultquist says.
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Overfunding a line of credit purchase
Though most HECM-for-Purchase borrowers use 100 percent of available HECM funds at closing, sometimes that’s not the best long-term plan. Hultquist recommends a strategy he calls “overfunding the purchase” as a more flexible option.
“Many homebuyers are not aware that with an adjustable-rate HECM, unused HECM funds may be set aside in a secure line of credit to be used for emergency purposes,” he says. “This available line of credit then grows at the same rate as the loan balance, regardless of future property values.”