Purchasing a Home With a Reverse Mortgage During Retirement
There is an ongoing conversation about the retirement income crisis in the United States. With nearly half of Americans at risk of outliving their money, there is a growing focus on alternative income sources to the old three-legged stool of relying on a retirement pension, Social Security benefits, and personal savings to fund retirement expenses.
Many retirees have significant equity in their homes. Equity is the market value of a structure that is unencumbered by debt. Home equity is a potential asset that could be used to improve their retirement prospects or lifestyle.
According to the Consumer Financial Protection Bureau (CFPB). as of 2011, approximately 70% of people 65 or older are mortgage debt-free. There are a variety of methods to tap into the equity in a home. A reverse mortgage is one of those methods, but there are many pros and cons to a home equity conversion mortgage (HECM).
One potential use of a reverse mortgage which has not been as widely publicized until recently involves using a reverse mortgage to purchase a home. This can benefit retirees seeking a cost-effective way to downsize their housing expenses, find a more suitable home for this season of life, or relocate to a more retirement friendly location.
What a Reverse Mortgage Means
A reverse mortgage (or Home Equity Conversion Mortgage) is a type of mortgage that allows homeowners to borrow against the equity in their primary residence. Borrowers must be 62 or older to qualify, and no repayment of the mortgage is necessary until the home is sold or the borrower dies or moves out of the home.
The amount you can borrow depends on the age of the borrower and spouse, current interest rates, the home’s value based on an appraisal, and the initial mortgage insurance premium (IMIP)—a one-time loan closing fee.
Unlike a traditional mortgage, no monthly payments are required with a reverse mortgage. Interest accumulates and it must be repaid along with the original amount borrowed when the house is sold, the borrower dies, or moves out for 12 months or more.
Using a Reverse Mortgage to Purchase a Home
Reverse mortgages have commonly been used to strategically help retirees stay in their homes as they age and to improve their cash flow. The home equity conversion mortgage for purchase provides the borrower with a fixed-rate, lump-sum loan that is applied to the purchase of a home. The loan program is sponsored by the U.S. Department of Housing and Urban Development, Federal Housing Administration (HUD-FHA).
A down payment is required and as a result, you essentially need to pay about half of the home’s price using your own cash and savings. The down payment can even come in the form of a gift from friends and family. You don’t have to own existing property or sell your existing home to qualify. But the home you are purchasing through a HECM for Purchase must become your primary residence.
Borrowers must meet the following requirements in order to qualify for a Home Equity Conversion Mortgage for Purchase:
- The minimum age to qualify is 62.
- The purchased home has to become your primary residence.
- You must be able to continue to pay for property taxes, insurance, HOA dues, or any other property maintenance costs.
- You must not have any federal debt obligations
Pros and Cons of a Reverse Mortgage
Unlike traditional mortgage products, there are no monthly payments required with a reverse mortgage. This allows for the possibility of purchasing a house without needing to drain retirement savings to make regular monthly payments.
It also provides retirees or pre-retirees with the opportunity to purchase a home that may be in a more desirable retirement location or better suit their changing needs without losing the purchasing power of their entire retirement nest egg.
One of the biggest downsides of reverse mortgages is usually related to the cost. Another potential risk is that the interest will eventually eat away at your equity. The longer you live and stay in the property the greater chances your equity may drastically be reduced or disappear.
Another is the fear that you may lose your home or your family will not be able to take over the property once you have passed. Retirees with cash flow concerns could eventually find that the property taxes, insurance, and other expenses may become difficult to maintain.
Before you can access the HECM program you must meet and talk with an approved counselor who will assess your situation and eligibility.