Buying a home with a reverse mortgage
Many people have heard of a reverse mortgage, which allows retirees to tap into the equity that they’ve built in their homes. You may have also heard of a home equity conversion mortgage, or HECM (pronounced heck-um), which is the type of reverse mortgage offered by Rate. But what you may not realize is that some buyers can use a reverse mortgage or HECM to buy a home.
The confusion is understandable. The way reverse mortgages have always been explained is that they allow you to tap into the equity that you’ve built up in your home after owning it for many years. If you’ve just bought a home, most people would assume that you don’t’ have much equity built up in that home right away.
But the HECM for purchase program allows you to finance the purchase of a home through a reverse mortgage. This means you’ll have access to funds through the reverse mortgage, plus you generally won’t have to pay a monthly mortgage payment.
We’ll share more details about HECM for purchase below, but if you’re interested in this financial tool for homebuyers over 62, you’ll need to work with a lender who specializes in these types of loans.
Review: Reverse mortgage or HECM
With a traditional mortgage, every payment you make builds equity in your home. Eventually, you’ll own a larger share of your house than your lender does, and one day, you’ll pay off that loan in full.
As the name implies, a reverse mortgage flips the roles of the lender and the borrower. The lender pays money to the borrower based on the equity they have in their home. Keep in mind that while the lender will make monthly payments to the borrower, you are still responsible for any applicable taxes, insurance premiums and association fees.
HECMs are specialized financial tools designed specifically for seniors who may need extra money to cover their expenses. However, there are certain criteria you must meet to qualify for a FHA HECM. You must:
- Be at least 62 years old
- Own 60% or more of your home’s equity, in most cases
- Apply for a reverse mortgage using your primary residence
With a reverse mortgage like a HECM, you may not be required to make monthly mortgage payments at all. Instead, your lender pays you. Those payments can come in monthly installments, lump sum deposits or a line of credit to draw from.
Keep in mind that with every reverse mortgage payout, your equity decreases. So, if your No. 1 priority is to one day own your home outright, this is not the financial tool for you. The bank expects you to pay the loan back eventually, of course, but only when the house is sold or otherwise changes hands.
How to use Reverse for Purchase
In order to use reverse, or HECM for purchase, buyers need to establish a good chunk of equity upfront. That’s why borrowers typically make a large down payment, around 50%, and use a HECM to finance the remaining balance of the price of the home. That allows borrowers to tap into that ~50% of equity right away.
Let’s say that a retired couple wants to sell their home for a smaller home, downsizing to take advantage of the equity that they’ve built up in their home after years of living there. By using HECM for purchase, they’d have even more financial flexibility.
For purposes of this example, let’s say they made $500,000 on the sale of their home and are buying a new home for $300,000 by paying 55% of the purchase price as down payment.
Proceeds on sale of original home | $500,000 |
Purchase price of new home | $300,000 |
Down payment on new home | $165,000 |
Amount of the reverse mortgage | $135,000 |
Funds available | $335,000 |
Sample provided for illustration purposes only and is not intended to provide mortgage or other financial advice specific to the circumstances of any individual and should not be relied upon in that regard. Rate cannot predict where rates will be in the future.
In this example, that retired couple now has $335,000 in funds—$200,000 from downsizing to a less expensive home, and $135,000 from the HECM.
Benefits of Reverse for Purchase
The big benefit of using a HECM for purchase is that you can relocate in retirement, possibly downsize or move to a retirement community or to be closer to family, while tapping into the equity of your home. It can help you handle your living expenses during retirement, and even have extra funds to take advantage of the extra time you’re given in your retirement years.
HECM for purchase offers you:
- A variety of payment options, including not making a monthly mortgage payment at all
- No pressure to make a payment at any time, even if interest rates increase
- Your line of credit will never be frozen if interest rates go up
- The untouched funds in your line of credit grow over time — and it’s completely tax-free
- You can protect other assets in your estate from creditors
- Your line of credit stays the same even if the home’s market value drops
- You don’t need to worry about the risk of foreclosure due to missed principal and interest (P&I) payments, because there are none to make
- Money you would have spent on your conventional mortgage payments can go to other needs
How reverse for purchase works
The process to secure a HECM for purchase mortgage is a little more involved than a traditional mortgage or a HECM for your current home. But it is relatively straightforward. You will need to work with a HECM specialist to help you assess your needs and work with you through the application process.
Sell your current home.
- A HECM must be used for your primary residence, so you’ll have to divest yourself of your home if you own it.
Find your new home.
- You can use the proceeds from the sale of your old home, but keep in mind that you’ll be required to put in a larger down payment (50% or more) to qualify for the HECM.
Work with a HECM specialist.
- A licensed loan officer will assess your individual needs and share the benefits of a HECM or reverse mortgage with you.
Work with a HECM counselor.
- HECM or reverse mortgage applicants are required to undergo independent counseling to ensure that they fully understand their financial decision.
Apply.
- An expert loan officer will be by your side to let you know exactly which supporting financial documents you’ll need to provide.
Get your new home appraised.
- A home appraisal will be scheduled to determine your property’s value and ensure your home is in a livable condition.
Close on your new home!
Reverse for purchase can fuel an active retirement
Reverse mortgages can provide financial flexibility during your retirement. And reverse for purchase allows you to use the equity in your new home to keep you in good financial standing while letting you live in the home that’s right for your current lifestyle.
As with any financial decision, it’s important to carefully consider your home loan options, evaluate the pros and cons of each and decide if the reward outweighs the potential risks. Consult with one of our expert loan officers to evaluate your situation and help you decide if a reverse mortgage is right for you.
Applicant subject to credit and underwriting approval. Not all applicants will be approved for financing. Receipt of application does not represent an approval for financing or interest rate guarantee. Restrictions may apply.
Must meet financial assessment requirements and be responsible for monthly property charges such as property tax and homeowner’s insurance or could be subject to foreclosure. Applicant must qualify based off age, equity, current balances and other various factors. Restrictions may apply. This material is not provided by, nor was it approved by the Department of Housing & Urban Development (HUD), the Federal Housing Administration (FHA), or any other government agencies. Rate, Inc. is a private corporation organized under the laws of the State of Delaware. It has no affiliation with the US Department of Housing and Urban Development, the US Department of Veterans Affairs, the US Department of Agriculture or any other government agency. Applicant subject to credit and underwriting approval. Not all applicants will be approved for financing. Receipt of application does not represent an approval for financing or interest rate guarantee. Restrictions may apply, contact Rate for current rates. To find a Reverse Mortgage counselor near you, search the HECM Counselor Roster at https://entp.hud.gov/idapp/html/hecm_agency_look.cfm or call (800) 569-4287.
Charges such as an origination fee, mortgage insurance premiums, closing costs and/or servicing fees may be assessed and will be added to the loan balance. The loan balance grows over time, and interest is added to that balance. Interest on a reverse mortgage is not deductible from your income tax until you repay all or part of the interest on the loan. Although the loan is non-recourse, at the maturity of the loan, the lender will have a claim against your property and you or your heirs may need to sell the property in order to repay the loan or use other assets to repay the loan in order to retain the property. You should know that a reverse mortgage is a negative amortization loan which means that your mortgage balance will increase while your home equity decreases if you do not make principle and interest payments on your loan. This may make it more difficult to refinance the loan or to obtain cash upon the sale of the home. However, you will never owe more than the home is worth when the loan is repaid.