HECM for Purchase – How Does It Work?

Using a Reverse Mortgage to Purchase a New Home

While a reverse mortgage has traditionally been used as a way to remain in your home, borrowers can also use it to purchase a new primary residence under the Federal Housing Administration’s (FHA) Home Equity Conversion Mortgage (HECM) program.

Released in 2009, the HECM for Purchase Program allows the borrower to use the proceeds of a reverse mortgage to buy a new primary home in a single transaction.

Borrowers often consider this option if they are looking to downsize or relocate to a different part of the country so that they can age in place closer to family, or in a residence that is more suitable for retirement living.

How it works

In the example of a 67-year-old couple who wishes to buy a new primary residence valued at $300,000, a HECM for purchase could be a good option. The loan amount and proceeds will look something like this:

  • Loan amount: $194,400
  • Total settlement costs: $13,973
  • Loan proceeds: $180,427
  • Cash required to close: $119,573
  • Interest Rate: 4.5%

The borrower can meet the down payment requirement through the sale of a previous home or personal funds, and the rest of the home price will be financed through the HECM for purchase.

This example is based on the age of the youngest borrower, a fixed rate of 4.50%, an appraised value of $300,000, origination charges of $5,000, a mortgage insurance premium of $6,000 other settlement cost of $2,973, a mortgage payoff of $300,000, amortized over 204 months, with total finance charges of $332,856 and an annual percentage rate of 6.12%. Interest rates may vary.

The borrower is not required to make any monthly mortgage payments.  However,  they must continue to meet the obligations of the loan, such as remaining in the home as the primary residence, paying required property taxes and homeowners insurance, and maintaining the home according to FHA requirements.

Eligibility requirements of a HECM for Purchase

As with all reverse mortgage products, the borrower must be at least 62 years old. The purchased home must be a primary residence occupied within 60 days of the loan closing.

There are several other eligibility requirements:

• Property must be a single family home or an FHA approved condo

• The difference between the purchase price of the new home and the HECM loan proceeds must be paid in cash from qualifying sources such as the sale of prior residence, home buyer’s other assets or savings

• The borrower must complete a HUD-approved counseling session

Newly constructed homes are eligible as long as the property is habitable and a certificate of occupancy has been issued.

Is the HECM Purchase a good fit for me?

Whether you’re looking to move into a new home in a warmer climate or live closer to your family, the HECM for Purchase Program allows you a safe way to age in place in a home that is suited for your retirement needs.

The cost of purchasing a home in some retirement hot spots has dropped dramatically over the last few years. In states such as Florida, Arizona and California, home values are down an average of 48% according to the CoreLogic home price index.

These may be places to look for a new property that will allow for you to relocate through a reverse mortgage for purchase.

FHA-insured reverse mortgages are non-recourse loans, so if the loan exceeds your home’s value, you or your heirs will never be required to pay more than what the home is worth when the loan is repaid.

Have additional questions about whether the HECM for Purchase Program is right for you? Contact us today by calling us at (800) 976-6211 or sending us a message via our Contact page.

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