While you may have heard of a reverse mortgage, few people are aware of a related financial product available since 2009 called a Home Equity Conversion Mortgage (HECM) for Purchase. For many buyers 62 and older, it's an excellent way to purchase a new (or sometimes second) home for only half the asking price, with no monthly mortgage payments.
This can be a fantastic option for stretching your retirement funds much further, either by paying half as much for that active-adult home you're after, or by buying a house that costs twice as much as you're budgeted for.
How an HECM to Purchase Reverse Mortgage Works
To qualify for HECM financing for the purchase of a new home, a borrower must be at least 62 years old and must supply a down payment of approximately half the home price. Age does have its advantages, though; the older you are, the smaller the down payment you need. The loan is for buying a primary home that you'll live in at least part time.
You make no monthly mortgage payments on your new home. As with standard HECM reverse mortgages (which we explain a bit about below), you're getting a Federally insured loan that accrues interest until you no longer live in the home. Fixed and variable interest rates are available. You own your home, holding the title and deed, and it passes to your heirs.
To be approved, there are some underwriting guidelines, including a credit report pull (no score required) and proof of income and assets. That's because you're still responsible for paying property taxes, insurance, home upkeep and maintenance, utilities, and other normal expenses of home ownership. You have to demonstrate your ability and willingness to meet these obligations.
While it's not necessarily right for everyone, an HECM to Purchase is an exceptionally safe loan. That's because it includes a non-recourse feature in which the FHA guarantees that the borrower or heir will never owe more than the home is worth, even in the event of a real estate bubble bursting. This benefit is backed by the Federal government via the Mortgage Insurance Premium charged to the buyer.
If you want more specifics about the HECM to Purchase loan program, please feel free to contact us and we can connect you with a specialized lender.
About Standard Reverse Mortgages
And just in case you don't know about standard reverse mortgages, they're something to be aware of if you're a homeowner 62 or older who could use some cash to supplement retirement income, pay healthcare expenses, or deal with an unexpected cost.
Instead of making monthly mortgage payments, you get a loan against your home's equity. It's usually not taxed, nor does it generally interfere with Medicare or Social Security benefits. It accrues non-tax-deductible interest—and rates can change—until all named borrowers no longer live in the property. Sometimes you can get a fixed rate if you take the loan in a lump sum; you'll often be approved for a smaller loan this way, though.
You typically have to cover some fees when taking out a reverse mortgage. You retain the title and deed to your home and are still responsible for all associated costs, including property taxes, utility payments, maintenance and repairs, etc.
Various individual factors affect whether a reverse mortgage might be right for you. Consult a trusted financial advisor for personalized counseling, and have them or a qualified attorney review the terms of the reverse mortgage before signing up.
3 Types of Standard Reverse Mortgages
Single-Purpose Reverse Mortgages
These are the least costly option, offered by some State and Municipal governments and nonprofit agencies. They aren't available everywhere, but they're fairly easy to qualify for if you have low or moderate income. The main catch is that you and the lender agree on a single purpose for the money, whether it's medical bills, home improvements, or whatever.
Proprietary Reverse Mortgages
These are private loans from private companies. They are often the best way to get a more substantial loan, particularly if your home has a high value, and you can use the money however you like. However they tend to be more expensive—sometimes considerably so—than single-purpose loans.
Home Equity Conversion Mortgages (HECMs)
HECMs are insured by the Federal government and issued through the US Department of Housing and Urban Development. Unlike with cheaper single-purpose reverse mortgages, the money can be used any way you like. Generally speaking, the older you are, the more equity your home has built up, and the less you still owe on your home, the larger the loan you'll qualify for.