There is exciting news for anyone age 62 or older who wishes to downsize, up-size, move closer to family, move to a low maintenance community or finally buy your dream house.
HUD and FHA (the Federal Housing Administration) have a loan program specifically designed for home buyers, 62 and over, who are purchasing a new primary residence. Download this information.
There are several strategies for using this financial tool to your benefit explained in detail with examples below. They include:
- Purchasing a more expensive home than you could with cash alone.
- Buying your new home while adding to your retirement account.
- Building access to cash for use later in retirement while paying down the loan on your new home.
- Using your new home purchase to release you from mortgage payments so you can retire.
Before I get to the examples, here is some information about using the HECM reverse mortgage for purchase.
Special Purchase Loan with No Required Monthly Payments
This loan program is government insured and is called HECM for Purchase. HECM stands for Home Equity Conversion Mortgage, also known as a Reverse Mortgage. This program allows buyers to combine a down payment with loan proceeds to purchase a new home and NEVER make a monthly loan payment as long as they live in the home.
- The title to the home you purchase will be in your name, just as with any other mortgage. The Bank does not own your home.
- You will still be responsible to pay the Taxes, insurance, HOA dues, if any, and maintain your home, just as with any other mortgage
- The HECM for purchase loan often doubles your purchasing power. See the tables below for down payment estimate examples for different ages and home values.
- Easy to qualify for with lower credit requirements, and showing that you have financial resources to continue to make timely payments of ongoing property charges such as property taxes, insurance and homeowner association fees, if any.
- If there is a downturn in real estate values, there is NO personal financial liability for the buyer(s), their heirs or estate, for any loan balance that exceeds the value of the home when it is being sold.
- The most important feature of this type of loan is that there are NO required monthly loan payments.
Too Good to be True?
This is the point where many people say “it sounds too good to be true, so it must be!” The fact is that everything above is true and possible due to the fact that these loans are FHA insured. The FHA insurance is what makes it possible for you to have a mortgage loan that requires no monthly loan payment, lets you limit your down payment, and guarantees that you and your heirs will get all of the equity over the loan amount, and, even if home prices drop, never owe more than your house is worth when it is finally sold. And, for the higher priced homes, there are jumbo reverse mortgages available for purchase.
Borrower requirements for a HECM for Purchase reverse mortgage are:
- The minimum age is 62 years old.
- The home purchased must become the borrower’s primary residence.
- The borrower must be able to pay the home’s property taxes, insurance premiums, homeowner association dues and any other ongoing property costs.
- The borrowers must show a willingness to pay their bills and have no delinquent federal debt.
Types of eligible dwellings under HECM for Purchase:
- Single-family homes.
- Two- to four-unit homes with one unit occupied by the borrower.
- Condominiums approved by the U.S. Department of Housing and Urban Development.
- FHA-approved manufactured homes.
How is the amount of down payment determined?
The amount of the loan available is calculated by using the age of the youngest borrower, the lesser of the home sales price or appraised value, and the current interest rate. It is a HUD calculation and is not determined by an individual lender. The down payment is the amount needed over the loan amount. For home values at or below the FHA limit of $636,100, the down payment ranges from approximately 27% to 57% depending on age — older buyers qualify for less down and a larger loan. With the HUD calculation, older borrowers qualify for more in loan proceeds and therefore have a lower down payment.
For home values over $636,100 FHA limit, borrowers receive loan proceeds of 73% to 43% of the $636,100 limit to use toward the purchase price — older buyers qualify for a larger loan. The remainder becomes the down payment. For example: a 62-year-old would receive $237,695 in a reverse mortgage loan and a 96 year old would receive $464,389 in loan proceeds.
If a 62-year-old was purchasing a $800,000 home, she would pay only $562,305; the reverse mortgage would cover the remainder.
Sources of the Down Payment
Generally funds you have had for at least 90 days or may be from the sale of an asset that you already own. The most common sources of the down money are proceeds from the sale of a current home or money the buyer has in a checking, savings, CD, retirement account or investment account.
Strategies for using the HECM reverse mortgage when purchasing a home.
Strategy #1. Purchasing a more expensive home than you could with cash alone. You may want to either downsize or move into another more desirable neighborhood. With the increases in real estate prices, the home that you want may cost more than the money you would receive from the sale of your existing home. Not only is it difficult to qualify for conventional loans, but you may not want to have monthly payments depleting the money you have for daily living expenses. Some people would just stay put, but you have the option of moving if you want to.
You would use the cash from the sale of your existing home as the down payment and finance the remainder with the HECM reverse mortgage proceeds. You would not make any payments for the remainder of the time you live in the home and use the income form your social security and retirement accounts for your living expenses.
Strategy #2. Buying your new home while adding to your retirement account. You have enough to buy your new home, but you want to keep more in your retirement account. You may be a homeowner who’s home has significantly increased in value and/or you have adequate savings. You could use your savings or sell your home and use some, or all, of the proceeds to buy the home you want. However, living on a fixed income from your investments, you want to keep your accounts with as much money in them as possible for the maximum earnings.
You would use the HECM reverse mortgage to finance your new home purchase as a means to use less of your cash. This would allow you to keep more money in your retirement account, or increase the balance with the money from your home sale.
Results: With this strategy you accomplish two goals. A. You have a home that you want for the rest of your life with just the maintenance, taxes, and insurance to pay as you would with any home. B. You increase your retirement account so it will pay more each month during your retirement.
Strategy #3. Building access to cash for use later in retirement while paying down the loan on your new home. You may be still working and you would like to build cash for use later in retirement. Here you may want to either downsize or move into another more desirable neighborhood, AND you could qualify for a conventional loan. You have enough income to make payments. You also know that, with your retirement accounts alone, when you stop working you won’t have what you want in monthly income from the distributions or you want to be prepared for future expenses like home care, living assistance, or unexpected expenses.
You would finance your new home purchase with the HECM reverse mortgage instead of using a conventional loan, and you would make monthly payments into the HECM loan to take advantage of the Unique Line of Credit feature.
Unique feature of the HECM Loan: Any amount you pay into the reverse mortgage with a Line of Credit, first goes to pay off the interest, then reduces the principal, AND the full amount of your payment is ALSO credited to the Line of Credit. That means that you can get that money (and more) back out of the loan any time you want it. Here is why you can get more back than you put in. HUD requires the lender to increase the amount of the HECM Line of Credit by a rate of 1.25% more than the interest rate of the loan, compounded monthly. That means that you can build access to more cash later in retirement.
For example, let’s say a 65-year-old purchased a $600,000 home, financed $264,761 with the HECM reverse mortgage, and made the same monthly payment that you would with conventional loan, $1,346 per month. Here’s what would happen in 15 years:
Access to more money than you borrowed. The chart on the right shows that your monthly payment of $1,346 was credited to both your loan and your Line of Credit. The payment reduced your loan balance to $132,445 while your Line of Credit increased to $326,703. That increase is due to compounding interest of the growth rate that is applied to your Line of Credit balance each month. You can see from the chart that in 15 years you could actually get back more cash than you originally borrowed by using this strategy.
Results: With this strategy you also accomplish two goals. A. You have a home that you want for the rest of your life with just the maintenance, taxes, and insurance to pay as you would with any home. B. You could have access to even more cash than you borrowed in the first place to use later in retirement for living expenses, home care, accessibility remodeling, unexpected expenses, etc.
Strategy #4. Using your new home purchase to release you from mortgage payments so you can retire. You still have a mortgage and you would like to retire, but you can’t with the monthly payments. For this example let’s say that your loan balance is too large to be paid off with a reverse mortgage. Also, if you sold your home you would not get enough money from the proceeds to buy a suitable home. You feel stuck. There is a way you can retire and have a home that suits your needs.
In this case you can sell your home, use the proceeds of your sale as a down payment, and finance the balance of the purchase price with a HECM reverse mortgage. Let’s use the minimum age of 62 for the examples to be conservative. Older buyers would qualify for more loan amount.
Example A. You are 62 and your home is would sell for $940,000 and your mortgage is $400,000. That would give you about $500,000 proceeds after paying off the loan and real estate broker fees. You can’t find a home in the area you want to live for $500,000, but there are several that would suit you for $800,000. You use your $500,000 cash from your sale and finance the $300,000 with a HECM reverse mortgage.
Example B. You are 62 and your home would sell for $520,000 and your mortgage is $295,000. That would give you about $205,000 after paying off the loan and real estate broker fees. It is impossible for you to find a home for $205,000 that would be in an acceptable area for you. However, you could downsize and purchase a suitable home for $400,000 by using the $205,000 as a down payment and finance the balance with a HEM reverse mortgage.
Results: With this strategy you accomplish two goals: A. You have a comfortable home that you can live in for the rest of your life with just the maintenance, taxes, and insurance to pay as you would with any home. B. You can stop working and retire using your Social Security benefits and your retirement savings for your daily living expenses.
What happens when the home passes to the heirs?
The Heirs Have Choices
When the home value is more than the loan balance:
Normally there is equity in the home when the borrower dies. When the home passes to your heirs, they will have up to one year, with HUD approval, to satisfy the loan. This is to make sure they are not forced to make a quick sale and lose some of the equity. Some children or other heirs choose sell the property and keep the cash from the sale, and others choose to pay off the reverse mortgage from savings or by refinancing and live in the home. It is completely up to them how to handle their inheritance.
When the home value is less than the loan balance:
First, your heirs will never be responsible for any shortfall should the home value drop below the loan amount. The loan has a “non-recourse” clause that means the house alone stands for the debt.
Second, if they wish to keep the property, HUD has made rules that allow the heirs to keep the property at less than the market value. The heirs may satisfy the HECM debt (payoff the reverse mortgage) by paying the lesser of the mortgage balance or 95% of the current appraised value of the property.
Working with Your Real Estate Sales Professional
I work with your real estate sales professional in arranging the financing with the HECM reverse mortgage. The use of HECM for purchase is not widely known to many Realtors® and therefore it is important that I contact your Realtor® to go over the exact requirements for the purchase agreement. (See the HECM Loan for Purchase Contract Requirements document below) I have a Real Estate Broker License with CA DRE (#00517405) and years of experience, however I do not list or sell properties. I use my training and experience to offer assistance to your Realtor® in structuring the sale so that you get the deal you want in a form that will fit the HECM loan requirements.
Contact me sooner rather than later
Please fill out the contact form on the tab to the right of this page. I will be happy to give you more information about using this powerful financial tool to your benefit in the purchase of your next home. There is no fee or obligation involved, and your information will never be shared with anyone else.