Reverse mortgages are a popular choice for individuals looking to remain in their homes as they age.  However, a unique variant—the Reverse Mortgage Purchase—enables borrowers to buy a new home without paying all cash or taking a traditional mortgage. 

Opting for a Reverse Mortgage Purchase can be particularly beneficial for various life situations. 

Many find it an appealing option when considering the following:

  • The desire to downsize to a more manageable home, reducing the burden of upkeep.
  • The preference for a single-level dwelling that can better accommodate the needs of aging in place.
  • The need to move closer to family, ensuring support is within reach.

With a Reverse Mortgage for Purchase, often facilitated by the Home Equity Conversion Mortgage (HECM) for Purchase program, you have the opportunity to streamline the process.  This allows you to secure a reverse mortgage and acquire a new residence in a seamless transaction.

ARLO handing key to purchase home using reverse mortgage

Understanding the basics

The HECM for Purchase is the most common reverse mortgage borrowers use to purchase new homes.  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 qualify under the HUD financial assessment guidelines, but instead of having equity in a home, borrowers must be able to put down a large down payment with the reverse mortgage covering the rest (with no monthly mortgage payments).   

After completing a HECM for Purchase, borrowers must maintain the home to FHA standards and pay property taxes and homeowners’ insurance in a timely manner as well as any other property charges (i.e., HOA dues, etc.).  The main difference between using a reverse mortgage for purchase and getting a reverse mortgage later is that with the purchase, it is all one transaction, and therefore, there are no duplicate fees. 

The reverse mortgage for purchase product requires the borrower to cover the down payment on the new home purchase, which includes the required mortgage insurance that may be more a typical conventional home mortgage purchase but is still less than a purchase of any type and a reverse mortgage refinance later. 

So, if your plans call for a reverse mortgage, a single reverse mortgage purchase is much better than a purchase and a subsequent refinance.

Picture of neighborhood with sign that says "HUD approved property types"

Eligible property types

  • Single-family homes
  • PUD – planned unit development
  • 2–4-unit dwelling
  • HUD-approved condominiums

In all cases of new construction, a certificate of occupancy must be in place before the HECM for a purchase transaction.  Most property types can be purchased in a reverse mortgage, with several exceptions. 

Ineligible properties

The home must not be under construction and must be habitable.  Co-ops, boarding houses, B&Bs, and newly constructed homes where a Certificate of Occupancy has yet to be issued are ineligible.

Certain types of manufactured homes may not qualify for reverse mortgage financing.  Those built before 1976 will not. 

HUD publishes its minimum standards for Manufactured Homes, and any properties that do not meet those standards would be ineligible for the reverse purchase mortgage.

Down payment requirements 

The reverse mortgage for purchase program requires the borrower to cover the down payment on the new home purchase.  The down payment requirement for a purchase with a reverse mortgage is higher than most other types of financing, but then borrowers have no required monthly payments.

In many cases, borrowers use the equity from the sale of their existing house 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. 

If you need to use gift funds, you should always discuss with your lender so that you can verify the requirements for gift fund verification and eligibility in advance.

The down payment requirement is based on the following:

Typically, the down payment for a HECM for Purchase is 45-70% of the purchase price.  The following table provides examples of down payment requirements for various home prices and borrower ages.

 

HECM Purchase Down Payment Estimates by Age and Home Value

Age% Down$200,000$400,000$600,000$800,000$1,00,0000
62 67.2%$134,400$268,800$403,200$537,600$672,000
65 65.1%$130,200$260,400$390,600$520,800$651,000
7061.4%$122,800$245,600$368,400$491,200$614,000
75 58.5%$117,000$234,000$351,000$468,000$585,000
80 54.1%$108,200$216,400$324,600$432,800$541,000
85 47.9%$95,800$163,600$287,400$383,200$479,900
90 40.9%$81,800$163,600$245,400$327,200$400,900
Please note that this is not a lending offer. The down payment figures provided are estimates, inclusive of the majority of essential closing costs, such as a 2% upfront mortgage insurance fee and third-party closing costs. These estimates are based on an interest rate of 6.93%, which includes an expected rate of 6.10% and an adjustable CMT margin of 1.625%, accurate as of December 4, 2023.

 

Today's Reverse Mortgage Purchase Rates

2024 Lending LimitFixed Rate Adjustable Rate
$1,149,8257.180% (8.700% APR)6.885% (2.125 Margin)
$4,000,00010.125% (10.612% APR)11.385% (6.625 Margin)
Example calculation using fixed rate:
7.18% + .50% Monthly MIP = 7.68% in total interest charges. Fixed Rate APR calculated assumes a $250,000 loan amount and includes .50% Mortgage Insurance and standard 3rd party closing costs.

Allowable down payment sources

  • Cash on hand (Savings, 401k, etc.)
  • Proceeds from the sale of the home
  • Gift from family

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.  All funds need to be verified.

Gifts from someone involved in the transaction, in any way, are not acceptable.  Other less common funding sources, such as collateralized loans, savings bonds, employer assistance programs, and other means, can also be used.

  

Non-allowable down payment sources

Sweat equity, trade equity, rent credit, and cash from someone benefiting from the reverse mortgage transaction are unacceptable.  Cash advances from credit cards are also not accepted.

Example of a reverse purchase mortgage

Reverse Mortgage Purchase Example

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.

No one can foretell interest rates or how much your home will appreciate over the years, so estimates are prepared using a 4% annual appreciation of the home, and the interest is calculated using an “expected rate” based on a 10-year index and not the lower index from which you begin to accrue interest. 

Many properties appreciate more than 4% annually, but 4% is a solid, relatively conservative number.  If you feel your home will appreciate more or less, you may want to keep that in mind while considering the numbers.

The down payment includes all upfront mortgage insurance premiums and third-party closing costs.  After five years of making no mortgage payments, there would be $210,000 in home equity; after 10 years, there is still $257,000 based on the abovementioned assumptions.

Should the borrower decide to move into an assisted care facility later, the loan would become due and payable, but the borrower or their family can sell the home.  The home and any equity in the home over the outstanding loan balance always belongs to the borrower and their heirs. 

They can pay the loan off and keep the house, sell the home and keep the proceeds, or, in some cases, walk away and owe nothing.

The remaining equity largely depends on the home’s future appreciation, interest rates, the amount and timeliness of when reverse mortgage funds are drawn (which on a purchase is 100% at inception), and whether or not the borrower makes any early voluntary repayments.

Also See: Here’s an Ideal Reverse Mortgage Purchase Example

Weighing the pros and cons

The HECM purchase program can be an excellent option for those who want to move during retirement, as it allows them to do so without making monthly mortgage payments.  However, like all loans, there are some pros and cons.

Pros
  • For the government-insured HECM for Purchase, borrowers are afforded the same protections and benefits of all HECM loans, including its non-recourse feature, which means when the loan comes due, the borrower does not have to repay more than the home is worth at the time of sale.
  • The product allows borrowers to purchase a new home with a reverse mortgage, all in a single transaction.
  • The HECM for Purchase allows borrowers to eliminate their monthly mortgage payments while they enjoy a new home.
Cons
  • Like all mortgages, there can be a downside to reverse mortgages for some borrowers.  When a borrower passes away, the borrower’s heirs may see reduced inheritance after the home’s sale and repayment of the loan.
  • Upfront and ongoing insurance premiums are required to maintain the loan and standard closing costs.
  • A reverse mortgage is only suitable for some, and it’s essential to consult with trusted advisors about the options available and how a reverse mortgage compares.

Other considerations 

Another factor that borrowers may want to consider in purchasing with a reverse mortgage is the real estate agent’s experience with reverse mortgages.  While the mortgage originator can help answer questions along the way, borrowers may want to work with a real estate agent familiar with reverse mortgage transactions

FAQs for Home Purchase

 
Q.

Can you get a reverse mortgage on a purchase?

Yes.  The reverse mortgage has been available for purchase transactions since 2008.  FHA implemented this to eliminate the need for borrowers interested in buying a new home to do two transactions.
 
Q.

How does a reverse mortgage purchase work?

A reverse mortgage for purchase works similarly to a standard reverse mortgage.  The loan amount is calculated using the age of the youngest borrower/spouse and the interest rate.  The borrower then brings in funds at closing to cover the difference.
 
Q.

How much is the down payment required on a reverse mortgage purchase?

The amount of down payment required will depend on the borrower’s loan eligibility as determined by the HUD calculator.  This determination is based on a calculation of factors such as the age of the youngest borrower/spouse, the interest rate, and the HUD lending limit to determine the HUD Principal Limit.  The Principal Limit is the amount that the reverse mortgage will advance toward the transaction, and the borrower(s) would need to bring in the rest to complete the transaction.  For example, a 62-year-old borrower may be eligible for a loan-to-value percentage of ~36%.  A 92+-year-old borrower may be eligible for a ratio of ~65%, to which the borrower would also need to add any fees.  Curious about your down payment?  Try our reverse mortgage for purchase calculator.

 
Q.

How is a reverse mortgage purchase different from a traditional mortgage?

A reverse mortgage requires a larger down payment than a traditional loan purchase.  This is due to a reverse mortgage not requiring any monthly mortgage payment.  Additionally, a reverse mortgage purchase follows FHA guidelines with more regulations related to fees allowed to be paid by the seller, concessions from the seller, and property requirements.  Also See: Purchase Reverse Mortgage Purchase FAQs (Updated 2024)
 
Q.

Can you use a reverse mortgage purchase loan and then move to a nursing home?

To be eligible, you must occupy the property as your primary residence, and if you move into an assisted living facility, the home will not qualify as your primary residence.
 
Q.

Can I purchase a multifamily with a reverse mortgage and live in one of the units?

HUD does allow up to 4 units in the reverse mortgage program as long as the property is owner-occupied.
 
Q.

How can I find realtors who understand HECM for purchase?

A wealth of information is available to real estate professionals from HUD, industry sources, and HUD-approved lenders.  However, many individuals still need help understanding the program or, even worse, still harbor many misconceptions.  The best thing to do is call a few real estate firms in the area and ask if they have anyone in the office who has worked with purchase reverse mortgages.  The program is not highly restrictive but does have definite requirements.  Knowing those HUD rules and requirements can put you ahead of the game.
 
Q.

Does the reverse mortgage purchase appraisal need to be near the asking price or just over the loan amount?

HUD uses the same process on the reverse mortgage for purchase forward lenders use.  They will use the purchase price or the appraised value, whichever is less, to determine your benefits (loan amount).  So, the appraisal is at or above the sales price. In that case, the loan amount will be a percentage of the sales price (not the higher appraised value if it is above), depending on your age, as determined by the HUD calculator.  This means that if the appraised value is $100,000 and the sales price is $75,000, the loan amount will be based on the sales price of $75,000 despite the higher appraised value.  If the opposite were true, the appraisal comes in at $75,000 and the sales price is $100,000, HUD would not only not insure a loan on the $100,000 purchase price, but lenders would also not complete the transaction as it would be deemed an abusive transaction to the senior (selling a home to them at $25,000 over market value).
 
Q.

Can I use funds from a cash-out refinance for the down payment on a HECM purchase?

HUD does not allow using borrowed funds for down payment purposes on the HECM for purchase program.  You must have the funds in your account, which must be seasoned to be eligible for use.  The underwriter will ask for verification of the source of funds if there was a large deposit to the account during the 3 months before the application, but if the funds are seasoned (they have been in the account all along), there should be no issue.
 
Q.

Are condos eligible for the purchase reverse mortgage?

You can use a reverse mortgage to purchase a condominium.  The only thing that could make this difficult is if HUD does not approve the condominium project, as the project must be HUD-approved before you can close a reverse mortgage loan in that project under the HUD HECM program.  There are also jumbo or proprietary programs available that work for non-FHA approved condos, but I would recommend the HUD program first if at all possible as the loan amounts as a percentage of the value of the home would be higher, and the interest rates available would be lower.
 
Q.

Can I purchase with a reverse mortgage if I had a bankruptcy 3 years ago?

HUD is stricter on credit for the purchase program.  If the only derogatory credit you have is all around this time, it was all 3 years ago, and all credit since that time is good.  You have some documentation of the ailment; you may be OK with a strong letter of explanation, but you must let a lender pull your information and review it first.
 
Q.

Can my spouse use a reverse mortgage for purchase as the home’s sole owner?

If you’re in a state that permits the inclusion of a non-borrowing spouse in a reverse mortgage agreement—unlike Texas, where this is not allowed—you can start as an eligible non-borrowing spouse when initiating a reverse mortgage.  Your eligibility, however, might change if you fail to meet specific criteria set for spouses in reverse mortgage agreements.  Despite not participating as a borrower, being married requires your involvement in certain aspects of the process.  You are obligated to attend counseling sessions and sign specific documents.  Your eligibility status may be affected if you do not maintain residence at the property, among other requirements.  It’s important to note that you don’t need to be on the property title from the beginning, but this does not exempt you from the counseling requirement nor alter your initial status as an eligible non-borrowing spouse for the loan’s initiation.  HUD is stricter on credit for the purchase program.  If the only derogatory credit you have is all around this time, it was all 3 years ago, and all credit since that time is good.  You have some documentation of the ailment; you may be OK with a strong letter of explanation, but you must let a lender pull your information and review it first.
 
Q.

Can you sell the house, and if so, are there time constraints or limitations?

After obtaining a reverse mortgage through a purchase, you can sell with no specific time restrictions or limitations as you are the homeowner, and there is never a prepayment penalty.  If you decide to sell the home without causing any financial loss to HUD from the initial transaction, you retain eligibility for securing another reverse mortgage on a different property, should you choose to do so.  However, if HUD incurs a loss due to an early departure on your part (which is unlikely if you sell the property shortly after purchasing it), you would be ineligible for another reverse mortgage until the loss from the first loan is fully repaid.
 
Q.

Is it possible to sell a home with an existing reverse mortgage and use the proceeds to buy a new one with a new reverse mortgage, allowing both transactions to close simultaneously?

The answer is yes.  However, the new home can only be closed once the new reverse mortgage lender has verified that the old loan has been fully paid off.  Although it would be ideal if this process were instantaneous, HUD processes are not always that seamless.  Ensure you have a backup plan for the move in case there is a day or two delay between the two transactions.

2024 Purchase Changes & Improvements

  1. Assistance with Borrower’s Fees: Now, parties involved in the home buying process (like sellers, agents, and builders) can contribute up to 6% of the home’s cost to help with various fees.
  2. Uses of the 6% Contribution: This amount can cover expenses such as origination fees, closing costs (including credit reports and appraisals), prepaid items, discount points, interest rate reductions, and the initial mortgage insurance premium. However, it cannot be used for counseling fees.
  3. Additional Funding Options: Apart from the HECM loan, you can use other sources like premium pricing, gifts, disaster relief grants, and employer assistance to fund your share of the purchase.
  4. Premium Pricing Credits: Deals from mortgage companies or third-party originators are exempt from the 6% limit, provided they are not the seller, agent, builder, or developer.
  5. Seller-Related Fees: Usual seller fees, such as real estate commissions and home warranty costs, are permitted and do not count towards the 6% limit.
  6. PACE Liens: Clearing a Property Assessed Clean Energy (PACE) lien by the seller is not considered an interested party contribution under this program.

These updates make buying a home easier under the HECM for Purchase program by allowing more financial support from various sources.

For More Information:

  • Check the FHA Single Family Housing Policy Handbook at Hud.gov.
  • Refer to the Federal Register for detailed updates.

ARLO recommends these helpful resources: 

HECM Purchase YouTube Series