How to Buy a Home with a Reverse Mortgage
If you're 62 or older and you want to buy a house, you have three options: Get a traditional forward mortgage, use your savings to pay for the house in full, or get a special type of reverse mortgage called a Home Equity Conversion Mortgage for Purchase (HECM for Purchase, or reverse for purchase). You might choose this third option if you don't have enough income to qualify for a forward mortgage or enough savings to pay in full. Here's what you need to know about using an HECM for Purchase to buy a home.HECM for Purchase: Overview
While lenders can count your retirement savings, investment income and Social Security income to help you qualify for a forward mortgage, the formula they are required to use isn't generous. Even with $1 million in retirement assets, if you aren't working, your income might be too low to qualify for a forward mortgage. That's where a reverse for purchase comes in. (Learn about the differences in Comparing Reverse Mortgages vs. Forward Mortgages.)
The rules for eligibility and repayment are almost identical for an HECM for Purchase and a regular HECM that you might take out on the home you already live in.
• You must be at least 62 years old.
• You must live in the home as your principal residence.
• The proceeds are tax free. (See A Guide to Taxes and Reverse Mortgages to learn more.)
• There are no monthly payments. The loan gets repaid when you sell, move or pass away.
• You must stay current with required property expenses such as property taxes and homeowners insurance, as well as home maintenance. (Get the details in Do You Qualify for a Reverse Mortgage?)Buy a Home That Better Suits Your Needs
The main reason to use an HECM for Purchase instead of a regular HECM is that there's something major about the home you currently own and live in that isn't working for you. Maybe it's too far away from your family. Perhaps you have a two-story home, and your knees or hips are no longer cooperating with climbing stairs every day. Or maybe your home is too big for your needs or too expensive to maintain. Perhaps you can't or don't want to drive anymore and you need a place that's closer to your doctors and the grocery store. Other reasons you might want to move? To live somewhere with a better climate, or to live in a city or state where your retirement savings will stretch further because the cost of living or taxes are lower. (See Tips and Costs to Consider When Retiring in the U.S. and The Most Expensive States to Retire In.)
If you're happy in the home you currently own and expect to remain there for the next 10 years or more, a regular HECM might meet your needs. If not, an HECM for Purchase could help you buy a home that will. The property can be a single-family home, a two- to four-unit residence or a condo in a development that's approved by the Department of Housing and Urban Development (HUD).
An HECM for Purchase isn't just for seniors who currently own a home and want to own a different home, though. Even if you're currently renting, and even if you've never owned a home in your life, you can use an HECM for Purchase to buy one. (For help weighing your options, read Retirement Living: Renting vs. Home Ownership.)Funding Your Purchase
Before the government made the HECM for Purchase available in 2009, seniors would sometimes buy a home in one transaction, then reverse mortgage it in another transaction. The HECM for Purchase makes it possible to do both with one transaction. Not only is the process is simpler, it also saves money since you don't have to pay closing costs twice.
As with a regular HECM, an HECM for Purchase requires you to either own the home outright or have a substantial amount of equity. You'll need to pay somewhere between 50% and 100% of the purchase price at closing. This money can come from personal assets, such as proceeds from the sale of your existing home, proceeds from the sale of your investments, or the money in your checking, savings or retirement accounts. You can't use another loan, including a credit card cash advance, to pay the difference.
A family member or other disinterested party can also help you out with gift funds, but the seller of the home you're buying or anyone else who will benefit financially from the transaction (like your loan officer) cannot contribute. This rule means you can't ask the seller to pay your closing costs, as you could with a regular mortgage. You can, however, roll the closing costs into your reverse mortgage if you don't have the cash.
Whatever remaining percentage of the purchase price you don't pay from your assets or a gift will come from the loan proceeds from the HECM for Purchase. You can get a fixed-rate, lump-sum reverse for purchase to pay the difference, or for more flexibility, you can get a line of credit with an adjustable interest rate. With the second option, you withdraw only as much as you need up front, then have funds left over for later. The more assets you have, the more flexibility you have in deciding how much you want to borrow up front with your HECM for Purchase and how much you want to potentially borrow later. Other payment plans are available, but these two are the simplest. For more, see How to Choose a Reverse Mortgage Payment Plan.
How much you can borrow and how much you're required to put down depend on the youngest borrower's age, the loan's expected interest rate, the initial mortgage insurance premium and the property's appraised value, sales price or FHA loan limit, whichever is lowest. The older you are, the smaller your required down payment and the more you can borrow, all else being equal. For example, a 62-year-old who currently owns a home worth $300,000 and wants to use a reverse for purchase to buy a home that costs $200,000 might need to make a down payment of $107,800 and could receive $92,800 in HECM for Purchase proceeds according to the reverse mortgage calculator provided by reverse mortgage lender Security One. (See Picking the Right Reverse Mortgage Lender to learn more.)
Selling your existing home is not a requirement for getting an HECM for Purchase. However, the home that you finance with the HECM for Purchase must be your primary residence. You might use your other home as a vacation home or rental property, or perhaps you'd like to let a relative live there and take care of it.Things You Can't Do With an HECM for Purchase
You can't use a reverse for purchase to buy a home that hasn't been constructed yet. But you can use it to buy a brand-new home, as long as it's finished and has been issued a certificate of occupancy. You can't buy a co-op or certain manufactured homes, nor can you buy a major fixer-upper that doesn't meet the Federal Housing Administration's minimum property standards. (See more at: The FHA's Minimum Property Standards.) While a regular HECM lets borrowers use part of the proceeds to fix up their home if it doesn't meet these standards, the HECM for Purchase requires the seller to make any necessary repairs before closing.The Bottom Line
If you don't have significant retirement assets or enough monthly cash flow to support a housing payment on top of your other expenses, your current home doesn't meet your needs and your long-term plan is to age in place in a home that you own, an HECM for Purchase might be your best option to be happy and financially secure in retirement. But you must fully understand how this product works and explore your other options before you commit. Running out of money is a possibility, just as it is with a regular reverse mortgage (see How to Avoid Outliving Your Reverse Mortgage).