Reverse mortgages are known as a way to supplement a senior’s fixed income by tapping equity that has accrued in their home. But reverse mortgages also can be used to buy a new home.
The Home Equity Conversion Mortgage for Purchase, or HECM for Purchase, allows older Americans to buy a new home by putting a reverse mortgage on it.
Who can use a reverse mortgage?
A reverse mortgage is a type of home equity loan that allows homeowners to borrow against the value of their homes. No repayment of the mortgage (principal or interest) is required until the borrower dies or the house is sold.
Reverse mortgages aren’t for everyone. In fact, they were specifically designed for older Americans whose net worth was tied up in the homes they already owned.
But seniors who are empty nesters or otherwise find that their existing home no longer fits their needs can use a reverse mortgage to purchase a new primary residence.
Here are some key points you’ll want to know about these reverse mortgages before you apply.
Borrower requirements under HECM for Purchase to get a reverse mortgage are:
- The minimum age is 62 years old.
- Borrowers must own the property outright or have a considerable amount of equity in it.
- The home must be the borrower’s primary residence.
- The borrower must be able to pay the home’s property taxes, insurance premiums, homeowners association dues and any other ongoing property costs.
- The borrower must have no delinquent federal debt.
The property must pass certain requirements, such as meeting all FHA standards and flood requirements.
Types of eligible dwellings under HECM for Purchase:
- Single-family homes.
- Two- to four-unit homes with one unit occupied by the borrower.
- Condominiums approved by the U.S. Department of Housing and Urban Development.
- FHA-approved manufactured homes.
A change implemented in October 2017 has made it easier to get a reverse mortgage on a new-construction home.
Previously, a certificate of occupancy was required on the property at the time the loan application was submitted. Now, that paperwork may be provided any time up to when the loan closes, says Jenny Werwa, a spokeswoman for the National Reverse Mortgage Lenders Association.
How this reverse mortgage works
The reverse mortgage typically covers 38 to 71 percent of the new home’s purchase price, says Julie Didyoung, a HECM for Purchase specialist at Reverse Mortgage Funding. The buyer must come up with the rest from the sale of the former home, or from retirement accounts, gift money or savings.
The amount you can borrow under HECM for Purchase in a reverse mortgage depends on:
- The age of the youngest borrower or non-borrowing spouse.
- The current interest rate.
- The home’s appraised value.
- The initial mortgage insurance premium.
Many of the costs can be wrapped up into the loan, Didyoung says.
The new house is titled in the senior’s name, but the reverse mortgage lender still retains a security interest in it. There are no monthly payments as with a typical mortgage. Instead, the loan has to be repaid when the home is sold or the borrower moves out or dies. The repayment to the lender includes the amount borrowed, plus accumulated interest. Any remaining equity belongs to the borrower, heirs or estate.
“There’s also guaranteed no personal liability at (the) end,” Didyoung says. If the loan balance on the reverse mortgage exceeds the home’s value, the lender is insured against that loss.
Why it can be good
A reverse mortgage for purchase allows older Americans to buy a house that better suits their needs without dumping all their retirement assets into it, which would be the case in an all-cash transaction. It also lets them avoid dipping into their monthly fixed income, which would occur if they took out a traditional mortgage.
“This is not just a mortgage product. It’s a financial, cash-flow tool for retirees,” says Rob Cooper, national director of strategic partners for Reverse Mortgage Funding. “It gives them more purchasing power if they don’t want to drain all their assets. It also gives them the luxury to get a better lot, to add all the upgrades they want and to still have no mortgage payment.”
One drawback is that the senior loses equity in the second home, rather than building it, says Maggie O’Connell, reverse mortgage specialist at ReverseMortgageStore. The owner or the heirs get whatever is left in equity after paying off the reverse mortgage. In some cases, depending on the housing market, that may be nothing.
“The pitfalls are the result of the benefit of having no payments,” O’Connell says, “As a result, you have a higher loan balance. You have accruing compound interest. It’s a trade-off.”
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