A reverse mortgage allows homeowners 62 years old and older to supplement their finances by taking out a loan using the equity in their home. The money can be used for medical bills or any other expenses. The unique aspect of a reverse mortgage is there are no required monthly payments, and the loan only needs to be paid off if the house is sold or it no longer serves as the borrower’s primary residence.
A reverse mortgage can also be used to help someone purchase a home. In this type of reverse mortgage, known as an HECM for Purchase, the homebuyer provides a down payment and borrows the balance due without any obligation to make a monthly mortgage payment. It’s important to understand how an HECM for Purchase works, the requirements to qualify for this type of loan, and the pros and cons if you are considering this option.
- A Home Equity Conversion Mortgage (HECM) for Purchase allows qualifying borrowers to supplement a substantial cost of their home purchase with an HECM loan that does not require a monthly mortgage payment.
- A homebuyer who uses an HECM for Purchase to help buy a home will need enough cash to make a substantial down payment—typically 40% or more of the purchase price.
- An HECM for Purchase enables homebuyers to preserve other retirement savings, allowing that money to stay invested and grow.
- An HECM for Purchase loan includes a 2% mortgage premium that must be paid at closing, as well as other closing costs.
How To Buy a House With a Reverse Mortgage
To fully understand the HECM for Purchase process, it’s necessary to first thoroughly understand what an HECM is. The majority of reverse mortgages issued in the U.S. are HECMs. The distinguishing characteristic of HECMs is that they are insured by the Federal Housing Administration (FHA), which is part of the U.S. Department of Housing and Urban Development (HUD).
Many HECMs are used to supplement the borrower’s income. The amount that can be withdrawn against the equity the borrower has in the home depends on a number of factors, including:
- The current interest rate
- The age of the youngest borrower or eligible non-borrowing spouse
- The lesser of the appraised value of the home, the sales price, or the HECM FHA mortgage limit ($970,800 in 2022).
The HECM for Purchase process allows a borrower to use a home equity conversion mortgage to buy a home using the proceeds from the reverse mortgage. The biggest benefit of an HECM for Purchase, also known as Reverse for Purchase, is the flexibility you’ll have to repay as much or as little of the loan as you wish each month—or to make no monthly payments at all.
An HECM for Purchase loan must be repaid if you sell the home, no longer use it as your primary residence, die, or fail to meet loan obligations such as staying current on home insurance and property taxes. Because HECMs have a “non-recourse” clause, you and your heirs will never owe more on the loan than the appraised value of the home.
As Gabe Bodner, a Denver-based mortgage specialist at The Rueth Team of Fairway Independent Mortgage, told The Balance by phone, an HECM for Purchase lets borrowers afford the home they want while allowing their savings to continue growing for retirement.
“If you use a reverse mortgage strategically, you can still make a mortgage payment and gain equity while preserving your other assets, like an IRA or 401(k),” Bodner said. “By not using those prematurely, you can potentially save in taxes and penalties as well, ultimately providing more assets to give you a higher probability of financial success in retirement.”
You do need to have enough cash to make a substantial down payment on a home purchase, however—typically between 45% and 62% of the purchase price, depending on buyer’s age or the eligible non-borrowing spouse’s age. The amount of down payment necessary is calculated by HUD.
Here are some examples of the minimum down payment required for homes with various prices.
|Purchase Price||Down Payment at Age 62||Down Payment at Age 67||Down Payment at Age 71||Down Payment at Age 75|
These down payment amounts are estimates. Actual down payments will vary based on interest rates and other factors.
Closing costs for an HECM for Purchase include an upfront mortgage premium of 2% of the property value, as well as other lender and third-party fees.
Pros and Cons of Using an HECM for Purchase
Maximizes your purchasing power
Supplements cash flow
Preserves retirement savings for growth
Only borrowers over age 62 can qualify
Additional costs include an upfront mortgage premium
Loan must be repaid if the home is no longer used as a primary residence or if other circumstances apply
- Maximizes your purchasing power: An HECM loan can be added to proceeds from a home sale or cash on hand to help someone afford to purchase the home they desire.
- Supplements cash flow: An HECM for Purchase does not require a borrower to make a monthly mortgage payment, allowing that money to be used for daily expenses.
- Preserves retirement and other savings for growth: Instead of using savings in an IRA or 401(k) to help purchase a home, a borrower can continue to let those investments grow and also avoid being taxed on withdrawals.
- Only borrowers over age 62 can qualify: HECM for Purchase has the same age requirements as a traditional home equity conversion mortgage. According to Bodner, a proprietary reverse mortgage is available to borrowers 55 and older.
- Additional costs include an upfront mortgage premium: An HECM for Purchase includes a 2% mortgage premium that must be paid at closing. Alternatives to an HECM may be more affordable.
- Loan repayment requirements: As with any HECM, the loan must be repaid if the borrower stops using the home as a primary residence or fails to meet loan obligations such as paying property taxes or home insurance costs.
How To Get an HECM for Purchase
The FHA requires borrowers who are interested in obtaining an HECM for Purchase loan to complete a counseling program to determine if it is the right fit. Counselors will review program eligibility requirements and explain the financial implications of this loan. They also want to make sure that borrowers understand the provisions of loan repayment and consider options that may be a better fit. The FHA provides an online search tool for finding an HECM counselor.
You can also explore the list of all FHA-approved lenders (check the box that says “reverse mortgages”). If you meet the criteria for an HECM loan, this list of lenders is the starting point to getting an HECM for Purchase loan. You can also ask an HECM counselor for a list of lenders.
Frequently Asked Questions (FAQs)
When using an HECM for Purchase, what is the amount the interest is charged on?
With an HECM for Purchase loan, you will owe the amount you borrowed plus fees and interest. If you do not make a monthly payment on the loan, the amount will grow each month. As with a traditional mortgage, interest rates fluctuate, and you can get a fixed rate or an adjustable rate. In addition to interest, ongoing costs include an annual mortgage insurance premium of 0.5% of the mortgage balance. The interest and mortgage insurance can be rolled into the loan each month.
What are the income requirements for an HECM for Purchase?
To qualify to receive an FHA-insured reverse mortgage, a borrower must have sufficient financial resources to continue to stay current on property taxes, insurance, property upkeep, HOA fees, and other costs. In addition, the borrower cannot be delinquent on any federal debt. If you are planning to purchase a home using an HECM for Purchase loan, you will need substantially more for a down payment than when purchasing a home with a traditional loan—often more than 40% of the total cost of the home.
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Consumer Financial Protection Bureau. “Are There Different Types of Reverse Mortgages?”
U.S. Department of Housing and Urban Development. “Home Equity Conversion Mortgage Loans for Seniors.”
U.S. Department of Housing and Urban Development. “Maximum Mortgage Limits.”
National Reverse Mortgage Lenders Association. “HECM for Purchase: How Builders Can Benefit,” Page 3.
Consumer Financial Protection Bureau. “Reverse Mortgages”
National Reverse Mortgage Lenders Association. “What Is HECM for Purchase?”
U.S. Department of Housing and Urban Development. “How the HECM Program Works.”