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. (H4P)
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—a home without stairs, for example—at the same time as converting home equity into cash.
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 $765,650
HECM Purchase Down Payment by Age
Purchase Price $300,000 $400,000 $500,000 $600,000 $700,000
Age of Youngest Borrower/Spouse TOTAL Down Payment TOTAL Down Payment TOTAL Down Payment TOTAL Down Payment TOTAL Down Payment
62 $161,900 $211,700 $261,500 $311,300 $361,100
65 $156,500 $204,500 $252,500 $300,500 $348,500
70 $147,500 $192,500 $237,500 $282,500 $327,500
75 $140,600 $183,300 $226,000 $268,700 $311,400
80 $130,400 $169,700 $209,000 $248,300 $287,600
85 $116,900 $151,700 $186,500 $221,300 $256,100
90 $102,500 $132,500 $162,500 $192,500 $222,500
95 $93,500 $120,500 $147,500 $174,500 $201,500
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.
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.
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.
Current Reverse Mortgage Purchase Rates
Lending Limit Fixed Rate Adjustable Rate
$726,525 3.99% 3.60%
$4,000,000 5.95% 5.77%
3.99% + .50% Monthly MIP = 4.49% 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:
- Single family homes
- PUD – planned unit development
- 2-4 unit dwelling
- HUD approved condominiums
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
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 than a traditional loan purchase?
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.
- Purchase Reverse Mortgage FAQs
- Here’s an Ideal Reverse Mortgage Purchase Example
- Using a Reverse Mortgage Purchase for New Construction
- Read about our own HECM Purchase client success story in Kiplinger’s Retirement Report