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 an advantageous program. Additional reverse mortgages are available for purchase from various lenders, each with different specifications.
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 have the ability 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.
With a reverse mortgage for purchase, the borrower can buy the home in one transaction without coming out of pocket for the entire purchase price or making monthly mortgage payments. And since there is only one loan transaction, the borrower saves by paying the fees for two.
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.
Many borrowers find purchases later in life advantageous for many reasons, including but not limited to the following:
- They wish to downsize from their current home, which requires extensive maintenance
- A single-story home is more attractive than the existing home or is better equipped for aging-in-place
- They want to relocate to a home that is closer to family
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. 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:
- The age of the youngest borrower
- Current interest rates
- The price of the new home, or the HECM lending limit of $1,089,300
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 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 $208,434.91 $275,703.91 $341,895.91 $406,621.91 $472,811.91
65 $200,634.91 $265,803.91 $329,895.91 $394,021.91 $458,111.91
70 $189,834.91 $251,403.91 $311,895.91 $371,421.91 $432,911.91
75 $181,134.91 $239,803.91 $297,395.91 $355,021.91 $412,611.91
80 $167,934.91 $222,203.91 $275,395.91 $328,621.91 $381,811.91
85 $149,634.91 $197,803.91 $244,895.91 $292,021.91 $339,111.91
90 $128,934.91 $170,203.91 $210,395.91 $250,621.91 $290,811.91
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
2023 Lending Limit Fixed Rate Adjustable Rate
$1,089,300 7.180% (8.700% APR) 6.885% (2.125 Margin)
$4,000,000 10.125% (10.612% APR) 11.385% (6.625 Margin)
7.18% + .50% Monthly MIP = 7.68% 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 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
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 choose to 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.
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.
Other considerations and where to learn more
Another 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 familiar with reverse mortgage transactions.
Can you get a reverse mortgage on a purchase?
How does a reverse mortgage purchase work?
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.
How is a reverse mortgage purchase different from a traditional mortgage?
ARLO recommends these helpful resources:
- Purchase Reverse Mortgage Purchase FAQs (Updated 2023)
- Read about our own HECM Purchase client success story in Kiplinger’s Retirement Report