Complete Guide to a Reverse Mortgage for Purchase
By: Courtney Jorstad
February 5, 2023 • 8 minute read
A reverse mortgage is a great option for those looking to retire in place, but what if you are drawn to all the perks of a reverse mortgage but you want to relocate or downsize? Is a reverse mortgage still an option for you?
If you are interested in a reverse mortgage but you would like to relocate, borrowers may qualify for the home equity conversion mortgage for purchase (HECM for purchase) program, also known as a reverse mortgage for purchase or H4P.
A HECM for purchase is designed to allow borrowers to use a reverse mortgage loan to finance part of their new home purchase with a reverse mortgage. But exactly how does it work?
Reverse Mortgage Basics
Before we dive into how a reverse mortgage for purchase works, let’s make sure we understand the basics of a reverse mortgage.
The most common type of reverse mortgage is the home equity conversion mortgage (HECM), which is insured by the Federal Housing Administration (FHA). It is a loan similar to a regular mortgage, but it comes with very specific qualifications and requirements.
As the name implies, a HECM reverse mortgage works by converting a portion of the home’s equity into cash so that the money that borrowers receive is from the equity they’ve built up in their homes.
A reverse mortgage is only available to homeowners who are 62 years of age or older and have significant equity in the home.
In order to qualify for a reverse mortgage loan program, the home must also be the primary residence of the homeowners. This means that the homeowners must live in the home for most of the year. This also means that vacation homes, secondary homes, and investment properties cannot be used for a reverse mortgage.
Qualifying properties include single-family homes, two-to-four-unit properties in which the homeowners occupy one of the units, condominiums, townhouses, and some manufactured homes.
The first thing a reverse mortgage will do is pay off your current mortgage, if you still have one. For the remaining loan proceeds, homeowners can choose to receive their funds as a lump sum, fixed monthly payments, a line of credit, or any combination of the three.
The amount of money that homeowners are able to receive is based on a combination of the home’s value, the age of the youngest borrower, and the current interest rates. Reverse mortgages come with both fixed rate and adjustable-rate options.
One of the perks of a reverse mortgage is that it does not require monthly payments to pay it back.
This is one of the reasons a HECM loan is so appealing to those who are in retirement who are looking for a way to supplement their income or save for unplanned expenses. In fact, there are no rules about how the money may be used, which gives borrowers a lot of options.
A reverse mortgage is paid back when the home is sold, it is no longer the primary residence of the borrower, or when the last borrower or qualified non-borrower passes away, in which case the home is typically sold.
What is a Reverse Mortgage for Purchase?
A reverse mortgage for purchase allows home buyers to use a reverse mortgage to finance about half of the total sale price of a new home.
It allows homeowners to complete a reverse mortgage and new home purchase with a single transaction and with only one set of closing costs.
Just like a traditional reverse mortgage, borrowers are not required to make monthly mortgage payments on the portion financed by the reverse mortgage as long as the home is the primary residence of the borrowers. They are still required to meet the reverse mortgage loan obligations, which includes paying the property taxes, homeowners’ insurance, maintenance costs, and any required fees such as HOA fees.
There are no prepayment penalties, so borrowers may pay down the loan ahead of time or make interest payments if they choose to, but it is not required.
The loan balance will come due when the home is sold, the home is vacated for more than a year, or when the last remaining borrower passes away. If you remain in the home until you pass away, your children will have the option to sell the home and keep any proceeds or keep the home and pay off the loan.
The reverse mortgage for purchase is a non-recourse loan, which means that you or your heirs will never owe more than the home is worth.
The HECM for purchase program was created by the U.S. Department of Housing and Urban Development (HUD) in 2009. Before HUD created the program, borrowers would purchase a new home using a traditional mortgage and then days later apply for a reverse mortgage. The main problem with doing it this way is that borrowers would have to pay closing costs twice in addition to the hassle of applying for two mortgages.
How Does a Reverse Mortgage for Purchase Work?
Typically, when you purchase a home, you have two options for buying that home: pay cash or make a down payment and finance the rest with a traditional mortgage. Then, the homeowners have to pay off that mortgage with monthly mortgage payments.
The HECM for purchase gives borrowers a third option for purchasing a home. Borrowers will typically put approximately 50% down and finance the remaining balance through a HECM.
With a traditional reverse mortgage, you receive cash in the form of a lump sum, line of credit, and/or monthly payments. By comparison, a HECM for purchase allows you to use that money to purchase a home while any remaining money goes to the borrower.
The exact process may vary from lender to lender, but here is an overview of the steps you can expect when applying for a reverse mortgage for purchase:
- Step 1: Connect with a Lender. The first thing you will want to do if you plan to get a HECM for purchase is to connect with a lender. You can find a list of our recommended reverse mortgage lenders here. You will want to ask for a loan officer who specializes in HECM for purchase loans (not all of them do).
- Step 2: Connect with a Realtor. You will need to connect with a real estate agent who works with the HECM for purchase product. Your HECM for purchase loan officer should be able to help you with this step as they typically have connections with realtors and builders.
- Step 3: Complete a Counseling Session. In order to file a reverse mortgage loan application, all borrowers must complete a counseling session with a third-party counselor approved by HUD. Once completed, you will receive a certificate you can pass onto your lender.
- Step 4: Sell your current home. Before moving forward with the HECM for purchase, you will need to sell your current home so you can use the proceeds for the down payment on your new purchase.
- Step 5: Shop for a new home to purchase. During this time, you will also start to shop for the new home you wish to purchase. Your loan officer will help you understand how much you can afford.
- Step 6: Purchase the New Home. You will then purchase the new home with the proceeds from the sale of your previous home. Depending on your age, interest rates, and other factors, you will need to put down 50% to 60% of the purchase price. The remaining balance will be financed by the reverse mortgage.
- Step 7: Closing. At closing, you will finalize the new purchase and the reverse mortgage at the same time.
- Step 8: Receive Remaining Funds. If there are remaining funds, those will be distributed directly to you.
It’s important to note that the reverse mortgage for purchase process is not fast. In some cases, it can take six months or longer from start to finish.
Reverse Mortgage for Purchase Example
For illustrative purposes, we put together this fictional example:
Missouri couple John and Nancy decided they want to relocate to Arizona in search of warmer weather and to be closer to their daughter. If they use a HECM for purchase to buy their home, these are the options they have whether they decide to downsize or upsize.
|Downsize vs. Upsize?||Downsize||Upsize|
|Cash after sale of home||$500,000||$500,000|
|Purchase price of new home||$400,000||$700,000|
|Down payment required to purchase new home||$236,000||$405,500|
|Amount financed by Reverse Mortgage||$164,000||$294,500|
Who is a HECM for Purchase for?
If you are looking to relocate, downsize, or upsize in retirement, a reverse mortgage for purchase may be worth considering.
There are several advantages to a HECM for purchase versus paying for the entire home purchase with cash, including the following:
- It allows retirees to keep more of their nest egg, which for many is important as they head into retirement.
- It makes it easier to qualify for a nicer home than you might without it.
- It reduces monthly costs, since you will no longer have a monthly mortgage payment.
- It’s a good option for those who want to move into a new home and remain there as they age.
While most retirees tend to retire in place, there are several reasons retirees may want to move such as the following:
- Your current home is more house than what you need, and you want to downsize.
- Your current home is too expensive to maintain.
- You want to live in a retirement community.
- You want to move closer to your family.
- Your neighborhood isn’t as safe as it was when you first bought it years ago, and you want to move to a safer community.
- You want to move to a warmer climate.
- You want to upsize. (A study by Merrill Lynch and Age Wage found that when homeowners buy a new home in retirement, 49% of retirees don’t downsize, and 30% purchase larger homes.)
The Bottom Line
A reverse mortgage for purchase is a unique financial product that gives homeowners the option of moving in retirement without having to take on monthly mortgage payments.
If you would like to relocate, downsize, or upsize in retirement and your current home is paid off, or mostly paid off, a HECM for purchase is worth looking into.
To get started, reach out to one of our recommended reverse mortgage for purchase lenders.
This information is intended to be general and educational in nature and should not be construed as financial advice. Consult your financial advisor before implementing financial strategies for your retirement.