As you enter your golden years, you may be considering buying a new home. Many seniors look to purchase a new home during retirement, whether in order to right-size their lifestyle, live closer to family and friends, decrease the financial burden of their current home, or to move to a warmer climate.
For some, it makes sense to take advantage of using a reverse mortgage to finance a new home — this is known as a reverse mortgage for purchase (or, HECM for purchase). Read on to find out how the process works and whether it may be the right strategy for you to move into a home you love.
History of the Reverse Mortgage for Purchase
Prior to 2008, a senior who wanted to leverage a reverse mortgage to purchase a home would have to use a conventional mortgage to finance the purchase, then repay that mortgage using a reverse mortgage. For many, this meant that insufficient credit documentation or income would prevent the purchase of a dream home. That changed in 2008, when Congress authorized a program known as HECM for Purchase, which enables seniors to take out a reverse mortgage in order to purchase a new home. This program not only allows seniors to sidestep the qualifications for conventional mortgages, but also condenses costs to just one loan.
Before you choose this strategy to finance your next home, you should understand the requirements and expectations associated with HECM reverse mortgages.
Qualifications and Eligibility
To qualify for HECM for Purchase, you must be 62 years or older, with no outstanding federal debt in delinquency, and the home you wish to purchase must be your principal residence.
As for the type of home you’re buying, HECM for Purchase applies to:
- single-family homes
- two- to four-unit homes with at least one unit occupied by you
- U.S. Department of Housing and Urban Development-approved condominiums
- federally approved manufactured homes
A recently passed law allows lenders to take applications for new-construction homes prior to certification of occupancy. All of the above properties must also pass federal standards and flood requirements.
Using a Reverse Mortgage for Purchase
One of the primary benefits of a reverse mortgage is that it gives you the option of choosing your monthly mortgage payments or making no monthly payments at all. In fact, the lender pays you (up to a predetermined percentage of your new home’s total value), either in a lump sum or as a line of credit. Many people prefer the line of credit to avoid the temptation of spending all the money at once.
When you die or move again to another home, the amount given to you from the lender becomes due, and your heirs will inherit the remaining equity after interest and fees when you sell your home. In theory, you could also live in this home long enough that once your estate sells the home there would be no equity left after paying off the lender. While this doesn’t happen often, it explains the need for FHA mortgage insurance, which protects you and your heirs from ever owing more than the sale price of the home.
A reverse mortgage will cover anywhere from around 38-71% of a new home’s purchase price; the remaining balance must be paid from the sale of your previous home, or from another source of income or savings. The amount the HECM for Purchase covers will vary from person to person, based on age, current interest rates, and the appraised value of the new home.
As with many other loan programs, borrowers can choose between a fixed rate and an adjustable rate. The former is a known quantity; the latter often starts at a lower interest rate than the fixed-rate offering, but is the only reverse mortgage program that allows for the line of credit feature.*
You should always speak to a professional to understand the options available to you and the requirements for your unique situation. A reverse mortgage can offer an affordable strategy to finance the purchase of your next home and ensure you can live out the rest of your golden years right where you want to be.
To learn more about the reverse mortgage for purchase, and whether it’s the right strategy for you, contact our knowledgeable team at ARAMCO.