You may be familiar with a traditional reverse mortgage; however, did you know that a reverse mortgage can also be used to buy a home? It’s called a Home Equity Conversion Mortgage (HECM) for purchase, and is sometimes referred to as a reverse mortgage purchase loan.
A HECM for purchase allows seniors age 62 and older to purchase a new principal residence without required monthly mortgage payments.1 Senior homeowners use the proceeds from a HECM for purchase, plus the equity from the sale of a previous residence, to buy their next primary home. This is completed in a single transaction with one initial investment (down payment).“The program was also designed to enable senior homeowners to relocate to other geographical areas to be closer to family members or downsize to homes that meet their physical needs, i.e., handrails, one level properties, ramps, wider doorways, etc.”2
Property
Eligible property types include existing one-to-four unit properties where construction has been completed and the property is habitable. The property must meet all Federal Housing Administration (FHA) requirements including repairs to correct deficiencies that threaten health and safety or jeopardize the soundness and security of the property. Examples of major property deficiencies include: no running water, leaking roof, no primary heating source, inadequate electrical system, inoperable doors and windows, and state or local code violations. An appraisal is required for all HECM for purchase transactions.2
Processing
Should the borrower decide to cancel the HECM for purchase transaction, they can do so any time prior to the closing date. The borrower must notify all parties in writing of their intent to cancel. According to the Department of Housing and Urban Development (HUD) website, “Where earnest money has been provided, the senior should review the sales contract to determine if the earnest money is refundable.”2
Funding
The amount of money the borrower can receive is based on the age of the youngest borrower on title or eligible non-borrowing spouse, current interest rates, and the lesser of the appraised value of your home, sale price, or the maximum lending limit.
If the loan proceeds and equity from the sale of the previous residence are not enough to cover the sales price of the new home, borrowers can fund the difference using their own money, i.e. savings, retirement accounts, or money from the sale of assets. However, borrowers cannot satisfy the initial monetary investment or closing costs using funds from a loan on a car, home equity line of credit, investment property or second home. In addition, seller concessions are not allowed with a HECM for purchase.2
If you’d like to learn more about a HECM for purchase loan, please use our Reverse Mortgage Calculator or call us at 800-218-1415.
1 You must live in the home as your primary residence, continue to pay required property taxes, homeowners insurance and maintain the home according to Federal Housing Administration requirements. Failure to meet these requirements can trigger a loan default that results in foreclosure.
2 U.S. Department of Housing and Urban Development – HECM for Purchase Frequently Asked Questions – hud.gov, https://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/hecm/faqs_hecm.