The Ideal Reverse Mortgage Purchase Example

Understanding the HECM for Purchase Program

For borrowers aged 62 and over, the Home Equity Conversion Mortgage (HECM) for Purchase, often referred to as “Heck-um,” is a valuable financial tool that can be overlooked.  This HUD-insured program allows seniors to refinance existing homes, eliminate current loans, or obtain cash from their home’s equity for any purpose.  Additionally, it enables borrowers to purchase a new home without the burden of traditional mortgage payments.

For many seniors, traditional mortgage options can be challenging due to strict income requirements and the limitations imposed by monthly payments.  This often restricts them to homes they can buy with 100% cash.  However, the HECM for Purchase program offers an alternative by allowing qualified seniors to finance their home purchase while meeting specific income qualifications based on a residual income method.

Here’s how it works: the lender calculates the borrower’s debts and property charges, including taxes, insurance, and any HOA fees.  Debts include credit cards, auto, student, and other installment loans.  Additionally, the HUD calculation requires a monthly expense of 14 cents per square foot of living area to cover utilities and maintenance.  For example, this would amount to $280 for a 2,000-square-foot home.

The total of these charges is then compared to the borrower’s income to ensure they have sufficient funds remaining for living expenses based on family size and location.

By understanding and utilizing the HECM for Purchase program, seniors can explore more homeownership opportunities without the financial strain of traditional mortgage payments, allowing for a more flexible and comfortable retirement.

Recently Closed Reverse Mortgage Purchase Examples

Consider a family of two, a husband and wife, with a single monthly obligation outside of their home amounting to $280.  They were purchasing a 1,788-square-foot home in California, leading to a monthly expense calculation of $250.

Their monthly property taxes were $292, and homeowner’s insurance was $83.  The total obligations came to $905.  In California, the residual income requirement, the highest in the nation, is $998.  Despite having an income of just $1,903 per month from Social Security, this couple qualified for a $700,000 home in Orange County.

HUD’s guidelines allow borrowers with substantial assets but limited income to use a method called asset dissipation.  This approach enables borrowers to qualify by gradually drawing down their assets to supplement their income, which is particularly beneficial for those who might not qualify using conventional debt-to-income ratios.

By leveraging the HECM for Purchase program, borrowers can access more home-buying opportunities, even with limited monthly income.  This method provides a practical solution for seniors looking to secure a suitable home in retirement.

Next, let’s explore some additional benefits of the HECM for Purchase program for borrowers.

Primary Benefit of a Reverse Mortgage Purchase Loan

One of the main advantages of a reverse mortgage purchase loan is that it allows borrowers to buy a home without needing to pay for it entirely in cash.  This means that most borrowers can retain more of their assets for living expenses, furnishing their new home, or other needs.  By not having to use all their cash for the new home, borrowers often find they can purchase a better home than they otherwise could.

Consider the couple from our previous example.  They wanted to be closer to their family and found a newer single-level home that suited their needs better than the two-story home they sold.  After selling their previous home, they had almost $450,000 in cash but couldn’t buy in their desired area for that amount.  They were considering a condominium, which didn’t appeal to them, and they doubted they would qualify for a traditional mortgage.

Exploring the reverse mortgage purchase option turned out to be the perfect solution.  Despite their new home’s price exceeding the HUD lending limit of $1,149,825, they used about $355,000 of their cash and financed the rest, including costs, through the reverse mortgage.  This allowed them to keep the remaining cash in the bank, providing financial security and peace of mind.

Another example involves a couple who recently relocated from Washington to Palm Springs.  They were thrilled with the ease of the reverse mortgage transaction and delighted with the upgraded townhome they purchased.  Since their new home’s purchase price was under the HUD limit, they moved in with a total expenditure of only 48% of the purchase price.  They can now live in their new home for the rest of their lives without worrying about mortgage payments.

These examples highlight the flexibility and financial benefits of the HECM for Purchase program, enabling seniors to secure their ideal home while preserving their savings for other important needs.

Important Considerations for the HECM for Purchase Program

When utilizing the HECM for Purchase program, there are a few important considerations to keep in mind:

Firstly, the property must meet HUD Purchase guidelines.  While this is typically not an issue, there are some specific requirements borrowers should be aware of. For instance, if you plan on buying a condominium, the project must be approved and listed on HUD’s approved list. If the condominium is not already approved, the approval process can take weeks or even months, and approval is not guaranteed.

Most sellers are not willing to wait for this lengthy approval process, especially when there is uncertainty about whether the approval will be granted. Therefore, it’s crucial to verify that the condominium is HUD-approved before proceeding with your purchase to avoid potential delays and complications.

Understanding these guidelines and working closely with your lender can help ensure a smoother transaction when using the HECM for Purchase program.

New Construction Might Cause Delays

When dealing with new construction or homes that have recently undergone major renovations, it’s important to note that the lender cannot conduct the loan appraisal until the certificate of occupancy has been issued.  Many new home sellers aim to close the loan within days of the property’s completion and final certification, but the inability to start the loan process until this certification is obtained can lead to delays.

Additionally, sellers cannot include personal property in the sale unless its value is determined and subtracted from the purchase price to establish the adjusted sales price.  This adjusted price is used to calculate the reverse mortgage benefits or loan amount.

All reverse mortgage borrowers must attend HUD counseling, and in states like California, there is a mandatory 7-day cooling-off period.  This requirement, not originally designed for purchase transactions, can cause delays if not accounted for in advance.  To avoid potential holdups, purchasers should obtain their counseling certificates early in the process.

While these are some of the most common issues, we strongly encourage buyers to review the FAQs before starting their search and certainly before making an offer.  Understanding the rules and working with an experienced lender can ensure that the loan closes quickly and smoothly in most cases.

The HECM for Purchase program is an excellent tool for buyers aged 62 and over.  Most states have provisions for cases where one borrower is over 62 and the other is not.  There are special considerations to be aware of, but these are generally less significant in a purchase transaction than in a line of credit scenario.

Overall, the HECM for Purchase program offers a valuable option for seniors, providing a flexible and beneficial way to secure a new home without the financial strain of a traditional mortgage.

Take the Next Step: Use Our Reverse Mortgage Purchase Calculator

Understanding the benefits and requirements of the HECM for Purchase program can open up new possibilities for your retirement living.  Whether you’re looking to move closer to family, downsize to a more manageable home, or invest in a property with rental income potential, this program offers a flexible and beneficial solution.

Ready to explore your options? Our reverse mortgage purchase calculator can provide you with an estimate tailored to your unique situation.  By using the calculator, you can see how much you might be eligible to borrow and better plan your next steps.

Click here to use our reverse mortgage purchase calculator and take the first step toward securing the home that best suits your needs and lifestyle.  With the right information and tools at your disposal, you can make informed decisions and enjoy a more comfortable and financially secure retirement.

ARLO recommends these helpful resources: