What is a reverse mortgage purchase?

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. There are also additional reverse mortgages for purchase available from various lenders, each with different specifications.

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. 

After getting a HECM for Purchase, borrowers must keep the home up to FHA standards, pay property tax, and keep up with homeowners insurance. The program is run by HUD.

The main difference between a reverse mortgage for purchase and a regular mortgage is the way the home is bought. With a reverse mortgage for purchase, the borrower can buy the home in one transaction, without having to make monthly mortgage payments.

The reverse mortgage for purchase product requires the borrower to cover the down payment on the new home purchase, which is significantly more than for a standard single family home.

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

  • 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 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 program requires the borrower to cover the down payment on the new home purchase, which is significantly more than for a standard single family home.

In many cases, the equity from the sale of the old home 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.

 

The down payment requirement is based on:

 

Typically, the down payment for a HECM for Purchase is 50-60% of the purchase price. The following table provides examples of down payment requirements 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 PaymentDown PaymentDown PaymentDown PaymentDown 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
*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 2.36% (Adjustable CMT 2.125% Margin) as of 03/05/2021.

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

2022 Lending LimitFixed Rate Adjustable Rate
$970,8005.06% (6.06% APR)3.77% (1.75 Margin)
$4,000,0005.99% (6.99% APR)7.01% (4.99 Margin)
Example calculation using fixed rate:
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

Sweat equity, trade equity, rent credit, and cash from someone benefiting from the reverse mortgage transaction are not acceptable. 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 later 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.

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

Weighing the Pros and Cons 

The HECM purchase program can be a great 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 mortgage for some borrowers. In instances where a borrower passes away, the borrowers’ heirs may see reduced inheritance after the sale of the home and repayment of the loan.
  • There are upfront and ongoing insurance premiums required to maintain the loan, in addition to standard closing costs.
  • A reverse mortgage is simply not right for everyone, and it’s important to consult with trusted advisors as to the options available and how a reverse mortgage compares.

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.

Purchase FAQs

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 from having to do two transactions.
Q.

How does a reverse mortgage purchase work?

A reverse mortgage for purchase works in a similar way 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 down payment is required on a reverse mortgage purchase?

The amount of down payment required will depend on the borrower’s loan-to-value ratio. This ratio is determined by the age of the youngest borrower/spouse and the interest rate. For example, a 62-year-old borrower may be eligible for a loan-to-value ratio of 50%, while a 92+ year old borrower may be eligible for a ratio of 75%.
Q.

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

A reverse mortgage purchase requires a larger down payment than a traditional loan purchase, 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.

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