Did you know that a reverse mortgage can be used to purchase a new home?
It sure can, in a process called a Home Equity Conversion Mortgage Purchase. (HECM Purchase)
Basically, a new home is bought at the same time a reverse mortgage is taken, and the transaction is rolled into one.
The reverse mortgage for home purchase is an option for seniors who want to relocate, either to be closer to family, to downsize, or move to a home that better meets their needs—without having to make monthly mortgage payments.
In order to qualify for a reverse mortgage purchase, however, the down payment on the new property must be covered either by the sale of the previous home or through savings or other means.
Down Payment is based on:
- Age of youngest borrower
- Current interest rates
- Sales price or maximum lending limit of $822,375
HECM Purchase Down Payment by Age
Sales Price $300,000 $400,000 $500,000 $600,000 $700,000
Age Down Payment Down Payment Down Payment Down Payment Down Payment
62 $154,496.49 $203,601.49 $252,601.49 $301,601.49 $350,601.49
65 $148,901.49 $196,001.49 $243,101.49 $290,201.49 $337,301.49
70 $138,701.49 $182,401.49 $226,101.49 $269,801.49 $313,501.49
75 $129,401.49 $170,001.49 $210,601.49 $251,201.49 $291,801.49
80 $118,601.49 $155,601.49 $192,601.49 $229,601.49 $266,601.49
85 $105,401.49 $138,001.49 $170,601.49 $203,201.49 $235,801.49
90 $91,601.49 $119,601.49 $147,601.49 $175,601.49 $203,601.49
Interest rate used to arrive at down payment percentages 2.36% (Adjustable CMT 2.125% Margin) as of 11/29/2020.
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.
Allowable Down Payment Sources
- Cash on hand (Savings, 401k, etc.)
- Proceeds from sale of 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 sources of funding 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 or checking account or retirement fund.
Some forms of gift money are also OK, including gifts from family members, employers, a charity, or government organization with an interest in home ownership initiatives, or a close friend who has a documented interest in the borrower.
Gifts from anyone involved in the transaction in any way are not acceptable.
Other, less common sources of funding can also be used, such as collateralized loans, savings bonds, employer assistance programs, and other means.
Non-Allowable Down Payment Sources
Those that are NOT acceptable include sweat equity, trade equity, rent credit and cash (or equivalent) from someone benefiting from the reverse mortgage transaction or a third party that is reimbursed by someone benefiting from it.
Cash advances from credit cards are also not accepted.
Today's Reverse Mortgage Purchase Rates
2021 Lending Limit Fixed Rate Adjustable Rate
$822,375 3.06% (4.06% APR) 2.36%
$4,000,000 5.99% (6.24% APR) 5.50%
3.06% + .50% Monthly MIP = 3.56% in total interest charges. Fixed Rate APR calculated assumes $250,000 loan amount and includes .50% Mortgage Insurance and standard 3rd party closing costs.
Eligible Property Types
Most property types can be used in a reverse mortgage for purchase, with several exceptions.
The home must not be under construction and must be habitable.
Co-ops, boarding houses, B&B’s, and newly constructed homes where a Certificate of Occupancy has not been issued are ineligible.
Certain types of manufactured homes also may not be used.
Those built before 1976 and those built since then but failing to comply with Department of Housing and Urban Development standards won’t fit the bill for a Purchase reverse mortgage.
The amount that can be borrowed is dependent on age and home value.
It’s best to check with a lender on the amount that will be required as a down payment and whether sources of funding will be needed in addition to the proceeds of the previous home sale.
For those who do qualify, the reverse mortgage purchase can be used as a tool toward funding retirement in addition to moving to a new home that is more suitable for aging in place.
Tip: Calculate your down payment, current rates and more with ARLO Purchase Calculator
Reverse Mortgage Purchase Example
In this example we will use a borrower age 70 years old using a reverse mortgage for home purchase with a sales price of $400,000.
The required down payment is approximately $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 making no mortgage payments there is still $210,000 in home equity, after 10 years there is still $257,000.
Should the borrower decide at a later time that he/she needs to move into an assisted care facility, they may sell the home, the reverse mortgage balance is then repaid and the remaining said equity is theirs.
Of course, this assumes the home will appreciate at a modest 4%.
Remaining equity largely depends on the home’s future appreciation and whether you choose to make any type of repayment to the loan balance.
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 from having to do two transactions.
How does a reverse mortgage purchase work?
A reverse mortgage for purchase works very similar to a standard reverse mortgage. The loan amount calculations are the same as a regular reverse in that it uses the age of the youngest borrower/spouse and the interest rate to determine the loan to value that can be borrowed of the purchase price or home value (whichever is less). The borrower then brings in funds at closing to cover the difference.
How much down payment is required on a reverse mortgage purchase?
The amount of down payment required will depend on the loan to value that the borrower is eligible for. The loan to value is determined by the age of the youngest borrower/spouse and the interest rate. Loan to values for a 62-year-old start around 50% or so and can go as high as 75% for a 92+ year old.
How is a reverse mortgage purchase different from a traditional mortgage?
A reverse mortgage purchase differs from a traditional loan purchase in a couple areas. A reverse mortgage loan will require a larger down payment in most instances than traditional loans that can go as high as 95% loan to value. Additionally, a reverse mortgage purchase follows FHA guidelines that has more regulations related to fees allowed to be paid by the seller and concessions from the seller.
ARLO recommends these helpful resources:
- Purchase Reverse Mortgage Purchase FAQs (Updated 2021)
- HUD.GOV – HECM for Purchase Program Mortgagee Letter 2009-11
- Read about our own HECM Purchase client success story in Kiplinger’s Retirement Report