There is one financial tool available to borrowers age 62 and over that is not brand new but is often overlooked and that is the HECM for purchase or Reverse Mortgage Purchase Program.
The HECM (“Heck-um”) is HUD’s acronym for the Home Equity Conversion Mortgage and it allows borrowers to not only refinance and eliminate loans on their existing homes or obtain cash from their home to spend for any reason, it also allows borrowers to purchase a new home when needed.
For many borrowers over the age of 62, the income requirements for loan approval or the restrictions on their lives a mortgage payment would bring make buying a home with a standard mortgage out of the question.
This leaves many prospective homeowners 62 and over limited to just those homes that they can purchase utilizing 100% cash.
Borrowers do have to qualify for the loans, the income qualification is based on a residual income method, not a ratio method.
In other words, the lender has to start by adding up all of the borrowers debts as well as the property charges (taxes, insurance and HOA if there is one). Debts include credit cards, auto or other installment loans, student loans, etc.
Then the HUD calculation requires the lender to use a monthly expense calculation of 14 cents per square foot of living area to cover the property utilities and maintenance (this would be $280 on a 2,000 square foot home).
You add all these charges together and the borrowers have to have minimum amounts to live on for the rest of the month based on their family size and where they live.
Recently Closed Reverse Mortgage Purchase Examples
We have a family of two, husband and wife. They have just one monthly obligation outside the home of $280.00 and they were purchasing a 1788 square foot home in California so the monthly expense calculation was $250.
The monthly taxes were $292.00 and the homeowner’s insurance was $83.00 per month. Total obligations were $905 and the residual income in CA (being the most expensive region was $998 which meant that the borrowers qualified for a $700,000 home in south Orange County with just $1903 per month income, which their social security alone covered.
And HUD allows borrowers with assets but not a lot of income to dissipate the assets over time to make up for income that they may not have by way of conventional means.
The method of asset dissipation also allows more borrowers to qualify than they would otherwise have been able to, especially if they had to use the more conventional debt to income ratio method.
So now we can touch on some of the other benefits for borrowers who use the HECM for purchase program.
Primary Benefit of a Reverse Mortgage Purchase Loan
By not having to pay for the home with all cash, most of the borrowers have more assets left over to use for living expenses, furnishing the new home or just to keep on hand for any other needs.
By not having to pay for the new home 100% all cash most borrowers find that they can buy more home than they might have otherwise been able to buy.
Our example above was a couple who wanted desperately to be closer to their family.
The home they bought was a newer home, single level home that made their lives more simple than the 2-story home they sold and left.
They had almost $450,000 in cash after the sale of their previous home, but there was no way they could purchase in the area they wanted for that amount and so they thought they would have to choose between a condominium and a mortgage and they did not feel they would qualify for the mortgage (and the thought of the condominium was not sitting well with them at all).
They decided to look into a reverse mortgage purchase and are glad they did.
Even though their home was over the HUD lending limit of $970,800, they were still able to buy the home with about $355,000 of their own cash and the reverse mortgage put the rest down, costs included.
They put the rest of the money in the bank and are extremely happy they did so. We just closed another loan for a couple in Palm Springs who relocated from Washington and they were extremely pleased by the ease of the transaction and the very nice, upgraded townhome they were able to move into.
Because these borrowers choose a home with a purchase price under the HUD limit, they were able to move in with a total expenditure of only 48% of the purchase price and they too will be able to live there for the rest of their lives without having to make a mortgage payment.
Tip: You can calculate your exact down payment by using our online purchase calculator here.
There are a few things that borrowers need to keep in mind when utilizing the HECM for Purchase program.
Firstly, the property has to meet HUD Purchase guidelines. For the most part this is not a problem but HUD does have a few quirks borrowers need to know.
For instance, if you are planning on buying a condominium, the project has to be approved and on HUD’s list or the approval process could take weeks or even a couple months if approved at all.
Most sellers won’t wait for this approval, especially when the approval is not a certainty.
New Construction Might Cause Delays
If the home is new construction or has recently undergone major construction, the lender cannot even take the loan appraisal until the certificate of occupancy has been issued.
Many new home sellers want to close the loan within days of the property’s completion and the final certificate of occupancy and if you cannot even start the loan until this time, that would certainly cause a delay.
The seller cannot give the buyer personal property as part of the sale or the value must be determined and subtracted from the purchase price to arrive at the adjusted sales price upon which the reverse mortgage benefits or loan amount will be determined.
All reverse mortgage borrowers have to attend HUD counseling and in some states like California, there is a 7 day cooling off period for which legislators did not account for purchase transactions.
Purchasers should get the counseling certificates early so as not to create delays.
These are the most prevalent issues but we always encourage buyers to review the FAQs before they begin their search and certainly before they make an offer.
Once you know the rules and work with a lender who does a lot of these loans, they close quickly and smoothly in most instances.
They are great tools for buyers 62 and over and there are provisions in most states for when one borrower is over 62, even when the other is not.
There are special considerations so we urge borrowers with these circumstances to make themselves fully aware of the programs and restrictions, but those considerations are less a factor on a purchase transaction than on a line of credit.
All in all, borrowers over the age of 62 have a very good program at their disposal in the HECM for purchase program.
ARLO recommends these helpful resources:
- Download our Free .PDF Guide & Checklist
- Read: 12 Tips Before Purchasing with a Reverse Mortgage
- Here are 3 Common Reverse Mortgage Examples (Includes Illustration)
- Read a story from one of our own clients at Kiplinger Magazine: Buy a Home with a Reverse Mortgage