Reverse Mortgage To Buy New Home
Most seniors take out a reverse mortgage to help them stay in their existing home as they get older. But Myra Simmons, 67, took advantage of a little-known product: She used a reverse mortgage to finance a new home.
reverse mortgage to buy new home
Myra's 83-year-old husband, Billy, was having trouble using the stairs in their two-story townhome in Fort Myers, Fla. The couple sold their home and used a "reverse mortgage for purchase" to move into a one-story house nearby last summer. "Now I take what would have been my mortgage payment and put it in savings," says Myra, who works for the local county sheriff's office.
The Home Equity Conversion Mortgage (HECM) for Purchase was created by Congress four years ago to streamline home-buying transactions and cut costs, says Peter Bell, president of the National Reverse Mortgage Lenders Association. Before, seniors would buy a new home, incurring closing costs, and then take out a reverse mortgage on the new home, triggering new closing costs. The HECM for Purchase rolls this into one transaction and one set of closing costs.
As with a traditional HECM, a homeowner must be 62 or older to qualify for the federally insured HECM for Purchase. You don't make payments while you live in the house, but the loan and interest come due when you sell, move out for 12 months or more, or die.
Borrowers generally get a fixed-rate, lump sum loan, which goes toward the house purchase. The balance starts accruing interest immediately. You can leave some reverse mortgage proceeds in a line of credit for future use by taking an adjustable-rate loan, and you will pay interest only on the proceeds you use.
Unlike a conventional HECM, the HECM for Purchase requires a down payment. When you take out a conventional reverse mortgage, the loan proceeds are based on the equity in your home. With the new product, you start out with no equity because you don't own the new house yet.
For there to be equity to cover the accrued interest, the HECM for Purchase requires that you pay about half the home's sales price with your own cash. The reverse mortgage picks up the difference. "Essentially, the money you're putting in is your equity," says Ted George, a certified financial planner in Scotts Valley, Cal.To pay your half, you can use money from savings, the sale of your other house, or a gift from a family member. But the money cannot be borrowed.
Like any reverse mortgage, the older you are, the more money you can get from the loan and the less you must bring to the closing table. For instance, a 62-year-old who buys a $400,000 home with a reverse mortgage for purchase must make a down payment of $159,450, according to a recent quote using All Reverse Mortgage Company's calculator (opens in new tab). He can get a loan for $250,000 at a fixed rate of 3.99%, and the proceeds will cover $9,450 in fees and $240,550 of the purchase price.
When you were younger, your home was the perfect place. Your spacious backyard, shaded by trees, provided the place for your children to run, laugh, and play. Your kitchen, along with your fully stocked fridge, continuously provided plentiful meals to feed your growing family. Your living room and den, outfitted with the television of the house, served as the family gathering spot to lure each member away from their individual rooms in order to cultivate family bonding time.
During those years, you may have thought that the last thing that would ever enter your mind would be to leave the home you and your family love. But as you enter retirement and your children have left the nest, you may begin to realize that you prefer to age in a new home that better fits this stage in your life.
Perhaps the home that perfectly served your growing family in the past now seems too large for your current needs. Having a multiple-level home with several rooms and a huge garden may now take more work than you are willing to put in to maintain it and, if you are retired, you may prefer to downsize to a smaller, more manageable home. Or perhaps you need a home that caters to new physical needs, such as a one-level home with ramps or handrails and wider doorways. The allure of a warmer climate may be attractive, or you may simply choose to move closer to the rest of your family. Whatever your reasons, there is a viable option available to you for aging in a new home instead of your current one.
Single family homes and existing properties with four units or less are typically eligible for a HECM for Purchase, and according to the U.S. Department of Housing and Urban Development (HUD), the following properties are not eligible:
There are some aspects of the HECM for Purchase that differ from the traditional HECM reverse mortgage. Because reverse mortgages are meant to help seniors age in place, you must move into the new home within 60 days after closing, and the new home must become your primary residence.
Some borrowers are now using this loan product to help them buy their house. For American Advisors Group borrowers Andy and Beatrice Hollimon, the HECM for Purchase loan led them to their gorgeous new home: a 2,000 square-foot, three bedroom home in Lake Worth, Florida.
*Example shown is for illustrative purposes only. Actual down payment amounts vary based on interest rate, borrower age and other factors. This range assumes closing costs will be financed into the loan. Closing costs include an up-front mortgage premium of 2% of the property value and can include other lender and third party closing costs such as an origination fee, title insurance, appraisal fee, credit report fee and recording costs, among other costs. In addition to initial MIP, closing costs typically range from $10,000 to $15,000. Ask your lender or mortgage originator for more details.
The CRMP professional designation is awarded to someone who has demonstrated superior knowledge and competency in the area of reverse mortgages and dedication to upholding the highest ethical and professional standards. Read More
Reverse mortgage loans are often used by people who want to stay in their homes. Another type of reverse mortgage, called a reverse mortgage for purchase, allows borrowers to buy a new home during the transaction. You can take out a reverse mortgage and purchase a new home all in one transaction through the reverse mortgage for purchase program, often through the Home Equity Conversion Mortgage (HECM) for purchase program.
For those looking to move into a new home and stay there as they age, the HECM for purchase can be a very useful product. Additional reverse mortgages are available for purchase from various lenders, each with different specifications.
Applying for and qualifying for a HECM for Purchase follows the same process as applying for any HECM loan. Most requirements are the same: borrowers must be 62 or older and own their homes outright or have significant equity.
After getting a HECM for Purchase, borrowers must keep the home up to FHA standards, pay property tax, and keep up with homeowners insurance. HUD runs the program. The main difference between a reverse mortgage for purchase and a regular mortgage is how the home is bought. With a reverse mortgage for purchase, the borrower can buy the home in one transaction without making monthly mortgage payments.
Allowable property types include single-family homes, 2- to 4-unit properties, HUD-approved condos, and planned unit developments. In all cases of new construction, a certificate of occupancy must be in place before the HECM for a purchase transaction.
The reverse mortgage for purchase program requires the borrower to cover the down payment on the new home purchase, which is significantly more than for a typical single-family home. In many cases, the equity from the sale of the old house can be used for the down payment on the new home. In other cases, the borrower may need to cover the down payment through savings or other means.
If the value of the old home is less than the down payment required for the new home, the borrower will need to provide the difference in cash. Some gifts and other sources may also be allowed under FHA requirements, such as family gifts from those who do not have a stake in the transaction.
HECM Purchase Down Payment by AgeSales Price$300,000$400,000$500,000$600,000$700,000Age Down PaymentDown PaymentDown PaymentDown PaymentDown Payment62$208,434.91$275,703.91$341,895.91$406,621.91$472,811.9165$200,634.91$265,803.91$329,895.91$394,021.91$458,111.9170$189,834.91$251,403.91$311,895.91$371,421.91$432,911.9175$181,134.91$239,803.91$297,395.91$355,021.91$412,611.9180$167,934.91$222,203.91$275,395.91$328,621.91$381,811.9185$149,634.91$197,803.91$244,895.91$292,021.91$339,111.9190$128,934.91$170,203.91$210,395.91$250,621.91$290,811.91*Not an offer to lend. Down payment examples are approximate and include most necessary closing costs such as 2% upfront mortgage insurance & 3rd party closing costs. Interest rate used to arrive at down payment percentages 5.875% (Adjustable CMT 2.125% Margin) as of 11/30/2022. Request a free ARLO quote for exact down payment and costs associated with the state you are purchasing in as some states charge additional state specific taxes associated with purchase loans.
Proceeds from the sale of the previous home and savings are the most common ways for borrowers to meet the down payment requirement. There are other acceptable funding sources under the Federal Housing Administration, which is the insurer for the loan.
For sources that will work to finance the equity portion of the loan, borrowers can use an earnest money deposit or a withdrawal from a savings account, checking account, or retirement fund. Some forms of gift money are also OK, including gifts from family members, employers, a charity, a government organization interested in home ownership initiatives, or a close friend with a documented interest in the borrower.
In this example, we will use a borrower aged 70 years old, using a reverse mortgage for a home purchase with a sales price of $400,000. The required down payment is $182,000, or approximately 45% of the purchase price. The down payment includes all upfront mortgage insurance premium and third-party closing costs. After five years of making no mortgage payments, there is still $210,000 in home equity; after 10 years, there is still $257,000. 041b061a72