Reverse Mortgage for Home Purchase
In 2009, HUD announced the availability of the reverse mortgage loan for purchase transactions. Prior to this announcement, the reverse mortgage was used solely to refinance existing homes. With the advent of the purchase reverse mortgage, borrowers age 62 and over* can use the loan to purchase a new home as well as just pay off an existing lien or extract equity from a property they already own.
*Borrowers must be age 62 and over to qualify for a reverse mortgage however, eligible younger spouses of homeowners can also benefit from a purchase reverse mortgage.
A younger spouse who also lives in the home and is on title and agrees to the terms of the reverse mortgage (must live in the property, agree to pay the taxes, insurance and any property charges in a timely manner and maintain the property in a reasonable manner) is not a borrower on the loan but is known as an “eligible non-borrowing spouse” and can also live in the property for life without making a monthly payment on the loan – even if something happens to the borrowing spouse.
With a purchase reverse mortgage, borrowers use 100% of their eligible loan amount from the start of the loan to purchase the property. So, unlike the line of credit option on a refinance transaction where a non-borrowing spouse may not have access to remaining funds if something happens to the borrowing spouse before the line of credit is exhausted, the entire available line is used from the start.
Therefore, should the borrowing spouse predecease the non-borrowing spouse, there are no funds left unused on the line to which the non-borrowing spouse would not have access. The bottom line, with a purchase reverse mortgage, even with younger spouses you never have to worry about not receiving all the reverse mortgage proceeds.
Why would 62-year-old borrowers be interested in a purchase reverse?
Many borrowers determine that they need to move later in life or really would like to move but find that their income may be insufficient for a conventional loan so their ability to pay for the home that they would need/like to purchase may be limited to an all cash transaction, thereby limiting their selection.
Borrowers often look at homes in retirement communities, homes that are closer to family or friends, closer to medical or other needs or just homes that better meet their needs. Perhaps the home is a single story, has a smaller lot or is handicap accessible.
Many have been able to sell homes with mortgages and purchase a home that better met their needs with a reverse mortgage eliminating monthly payments and maintenance at the same time. Whatever the reason, the reverse mortgage allows borrowers to purchase the home and finance roughly half of the purchase price with no monthly payment (some even more and some a little less depending on the age of the youngest borrower).
This enables borrowers to move when they might have had to remain in a home that no longer met their needs or one, they could no longer afford. To find out what you would be able to receive with a purchase reverse mortgage, the first step is as easy as to use our reverse mortgage purchase calculator.
Down Payment Requirement
This is the amount of funds you put down from your savings or sale of another property to close your purchase The down payment on a purchase reverse mortgage can come from proceeds from another sale of real estate, sale of other personal property, or cash on hand including 401k, stocks, savings, bonds etc. Gift funds from Family are acceptable.
Remember, because you only must come in with a portion of the purchase price, you will be able to purchase more home than with standard financing while still having no monthly mortgage payment. This might just enable you to buy the home you felt was out of your price range but really meets your needs.
All Reverse Mortgage currently offers both the HECM and the proprietary or Jumbo programs giving borrowers several different options. Some borrowers want to just use a fixed rate loan and not worry about ever repaying the loan until they permanently leave the home. Some wish to repay a portion of the loan and may wish to reborrow.
If you have specific goals, let us know and we can help you determine which option will best suit your needs. A fixed rate loan is a “closed end” type of loan. You can repay any or all the funds at any time with no prepayment penalty but if you do, those funds may never be reborrowed.
The adjustable rate line of credit is an “open ended” type of loan. With the line of credit option, you can also repay funds at any time without penalty but then if you choose to reborrow them later, you can do so.
It is all about your goals and plans.
What is a reverse mortgage to Purchase?
A reverse mortgage to purchase is when you use a reverse mortgage instead of a traditional or forward mortgage to purchase a property. It allows borrowers to purchase a home with a loan program that does not require the borrower(s) to make monthly mortgage payments on the loan. Borrowers are still responsible for their maintenance on the property, the timely payment of their taxes, insurance and any property charges (i.e., HOA Dues, if any).
What is the downside of buying a home with a reverse mortgage transaction?
There are no real “downsides” to purchasing with a reverse mortgage, but you do need to be sure that the borrower, property and the transaction meet the HUD program parameters. If you try to purchase a home or use a reverse mortgage for a transaction that does not meet the HUD requirements, it will not work. HUD is specific about borrower requirements for the purchase program, the properties, fees, procedures it will allow and so borrowers should choose a lender familiar with the HUD program to ensure that the circumstances meet their guidelines before you get too far into the process only to be frustrated later.
The program is not overly difficult and the requirements are easily reviewed but in some areas are not flexible and the lender should know most information from the start (some things that are discovered with title examinations and appraisals cannot be known in advance but other information can be reviewed and assessed from the beginning). Borrowers can benefit greatly by speaking to a lender familiar with the program from the start.
How much do you have to put down for a reverse mortgage?
The down payment depends on a number of items. The basic benefit on a reverse mortgage is determined by the borrower’s age. The older you are, the more money you receive as a percentage of the home’s value. Another factor that affects the amount of money needed for down payment is the property value. Firstly, because the more expensive the home the more money you will need to put down but also because the current HUD lending limit is $970,800 and any home valued over this amount will not receive any higher benefit. And then interest rates also have an effect on the amount of money borrowers need to put down on a reverse mortgage because the higher the rate over 3%, the lower the Principal Limit or loan amount the borrower will receive. And the final factor really isn’t dependent on a reverse mortgage or a forward loan but one that deserves to be mentioned is where the property is located.
Some states have very low closing costs. Some states, such as Florida, Washington, New York, Pennsylvania New Jersey and a few others, closing costs typically run higher so the cost to close a loan in those state will also be higher. And some states like Washington charge higher costs for title if the property did not have an existing mortgage on the property. The takeaway is that the down payment will be healthy (after all, you won’t have to make a mortgage payment for as long as you live in the home) but will depend greatly on your circumstances so you really need to contact your lender for a really good estimate in your case.
How is a HECM purchase amount calculated?
You and your seller determine the purchase price of the property you wish to buy. Your age, the interest rates, the property value or purchase price and the HUD maximum limit all go into the calculator to determine the benefit amount or Principal Limit for your transaction. The lender you choose actually closes and provides the funding for the loan however the loan does not work without the HUD/FHA insurance so the lender must be certain to adhere to the HUD guidelines and requirements. Every lender uses the HUD reverse mortgage calculator to determine the benefit or loan amount based on your circumstances.
Is it hard to qualify for a reverse mortgage purchase?
It really isn’t hard to qualify for a reverse mortgage purchase at all. The income and asset requirements are known quantities and a lender with sufficient experience with the program can usually tell you about your qualification under the program in advance.
There are always circumstances that can arise with properties and other issues that the lender cannot know in advance (just like every other loan), but the HUD requirements are not difficult for borrowers with good credit and adequate income (HUD uses the residual income method to qualify and it is probably the easiest method under which borrower income qualification is determined for borrowers who do need to qualify with income verification).
Working with a Realtor? If you are ready to make an offer on a property and need help explaining to Realtors and sellers how the reverse purchase program works and how it will benefit all parties, please contact us. Remember that there are some very specific requirements for reverse mortgage purchases so we encourage you to contact us before you make your offer so that we can make sure that you and your real estate professional are completely up to date on all requirements in advance.
*Purchase Reverse Mortgage calculations are for illustration purpose only and are not an offer to lend. If you wish to receive a formal quote with an estimate of all loan charges, as well as an amortization schedule that will show interest accrued year by year please submit your information in the 3rd step of the calculator screen.