Table of Contents
- What is a reverse mortgage purchase?
- Understanding the basics
- Eligible property types
- Down payment requirements
- HECM Purchase Down Payment by Age
- Today's Reverse Mortgage Purchase Rates
- Allowable down payment sources
- Non-allowable down payment sources
- Example of a purchase reverse mortgage
- Weighing the Pros and Cons
- Top FAQs
What is a reverse mortgage purchase?
Reverse mortgage loans are often used by people who want to remain in their existing homes. But there is another type of reverse mortgage that comes with all the same benefits, except it allows the borrower to buy a new home during the transaction.
Through a Reverse mortgage for Purchase, or through the Home Equity Conversion Mortgage (HECM) for Purchase program, borrowers take out a reverse mortgage and purchase a new home all within a single transaction.
For those looking to move into a new home in which they plan to age in place, the HECM for Purchase can be a very useful product. There are also additional Reverse Mortgage for Purchase products available in today’s market with various specifications depending on the lender.
Understanding the basics
The HECM for Purchase is the most common among reverse mortgages used by borrowers to purchase new homes. Applying for and qualifying for a HECM for Purchase follows the same process as applying for any HECM loan and most of the requirements are the same: borrowers must be 62 or older and they must own their homes outright or have a significant amount of equity.
Once they get a HECM for Purchase, borrowers must maintain the home to Federal Housing Administration (FHA) standards, and they must continue to pay property tax and homeowners insurance. The program is administered by the Department of Housing and Urban Development (HUD).
Where the Reverse Mortgage for Purchase differs is in the closing transaction for buying the new home. Within a single transaction, the borrower can purchase a new home with the reverse mortgage, essentially eliminating monthly mortgage payments from the new home purchase.
As in any reverse mortgage, the interest accrues over time and the loan must be repaid when the borrower passes away or moves from the home permanently.
While most borrowers utilize the reverse mortgage product to remain in the home they currently own, a proportion of borrowers use the Reverse Mortgage for purchase to relocate. They may do this in instances where:
- They wish to downsize from the current home, which requires extensive maintenance
- A single-story home is more attractive than the existing home, or is more equipped for aging in place
- They want to relocate to a home that is closer to family
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, there must be a certificate of occupancy in place prior to the HECM for purchase transaction.
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 may not be used.
Those built before 1976, and those built since then, but fail to comply with Department of Housing and Urban Development standards, won’t fit the bill for a purchase reverse mortgage.
Down payment requirements
The Reverse Mortgage for Purchase product has one key requirement: the borrower must be able to cover the down payment on the new home purchase as part of the product. This requirement is significantly more than the down payments required for standard single family home purchases.
In many instances, the equity from the sale of the former home can be used to cover the down payment. In other instances, the borrowers may cover the down payment through savings or other means, or they must provide that cash to make up the difference between the former home value and the new home’s down payment requirement, if there is one.
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.
The down payment requirement is based on:
- The age of the youngest borrower
- Current interest rates
- The price of the new home, or the HECM lending limit of $822,375
Typically, the down payment required is roughly 50% of the purchase price of the new home.
The following table provides examples of down payment requirements for borrowers utilizing a HECM for Purchase for various home prices and borrower ages.
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
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.
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.
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 account, checking account, or retirement fund.
Some forms of gift money are also OK, including gifts from family members, employers, a charity, government organization with an interest in home ownership initiatives, or a close friend who has a documented interest in the borrower.
Gifts from someone 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.
Example of a purchase reverse mortgage
In this example, we will use a borrower aged 70 years old, using a reverse mortgage for 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 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, where 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.
Weighing the Pros and Cons
The HECM for Purchase can be a highly beneficial tool for those who find themselves wanting to move to a new home during retirement, in that it essentially allows them to do so without making monthly mortgage payments toward repaying the loan.
However, like all loans, there are some pros and cons.
Other considerations and where to learn more
One additional factor that borrowers may want to consider in getting a Reverse Mortgage for Purchase 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 who is familiar with reverse mortgage transactions.
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 at around 50% 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, and 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)
- The Realtors Guide to Reverse Mortgages for Home Purchase
- Read about our own HECM Purchase client success story in Kiplinger’s Retirement Report