Yes, you can use a reverse mortgage loan to purchase your next home. A HECM for purchase loan allows a borrower to buy a home and not have to worry about making a mandatory monthly mortgage payment, for as long as it remains their primary residence.
Unfortunately, this is one of the least publicized reverse mortgage loan programs. It can be a great way to finance your dream home for retirement. Although many associate retirement with down-sizing, this program offers other alternatives. To further illustrate how it all works, let’s review a few examples.
*Disclaimer*- All examples are hypothetical. If you’d like to receive an accurate quote, seek the consult of a licensed loan officer. Click here to request a brief consultation.
In the first example, Mrs. and Mr. Smith decide to use a reverse mortgage to purchase a larger home on their favorite lake. They both recently retired and decided to move away from the city. They were able to sell their current townhome for $150,000. Will they be able to afford a larger, more expensive home with this program?
Property Value: $200,000
Assumed Principal Limit: (.524 x $200,000) = $104,800
The answer is yes! Given this criteria, the Smiths will be qualifying for $104,800. Assuming the closing costs total around $6,000*, the borrower will bring $101,200 ($200,000 - $110,800) to purchase the $200,000 home. The reverse mortgage is the new lien on the home, and they will never have to worry about making a mortgage payment. As mentioned before, they sold the previous home for $150,000. If they only spend $101,200 on the new home, they will have about $49,000 remaining from the previous home sale.
In the next example, a borrower decided to downsize after the passing of their spouse. The borrower was able to sell their current home for $350,000. With a reverse mortgage for purchase loan, they can purchase a new home, put less money down and not incur a monthly payment. Let’s see what that looks like in further detail.
Purchase Price of New Home: $200,000
Assumed Principal Limit: (.631 x $200,000) = $126,200
Given this criteria, the borrower will be qualifying for $126,200. Assuming the closing costs total around $6,000*, the borrower will bring $79,800 ($200,000 - $120,200) to purchase the $200,000 home. The reverse mortgage is the new lien on the home, and they will never have to worry about making a mortgage payment. As mentioned before, the borrower sold the previous home for $350,000. If they only spend $79,800 on the new home, they will have about $270,000 remaining from the previous home sale. Now that available cash can be put toward investments, or potentially replenish dwindling savings.
As demonstrated in these examples, reverse mortgage loans can serve the needs of completely different borrowers with different desires. If anything is to be gained from reviewing these hypothetical examples, please know this; It is imperative you seek the consult of a licensed professional. Once they know your goals, and objectives, they can properly advise you on the most appropriate solution
Here are some of the pros and cons of the reverse mortgage for purchase program:
HECM for Purchase Advantages:
- Not making a monthly mortgage payment
At this stage in life, the last thing seniors should be spending money on is a mortgage they may not outlive. What is the point of selling your home if you have to go elsewhere to either pay rent or a mortgage? With this option, you are saving valuable disposable income to enjoy life.
- Using money elsewhere may be more beneficial
As mentioned in the examples, both borrowers will be left with quite a bit of proceeds once the reverse for purchase transaction has been completed. Instead of taking that money and putting right into another house, why not leverage it more effectively? That money could go toward investments, savings, outstanding bills, grandchild’s tuition, etc. The idea is having more liquidity reassures our peace of mind.
HECM for Purchase Disadvantages:
- Closing costs can get exorbinant with this option
Because it is a purchase transaction, lenders do not have the ability to offer many pricing concessions. They cannot offer lender credit to cover costs. The only thing they have control over in this case is the origination fee. Lenders cannot change what 3rd party costs will be.
- High initial loan balance, interest accumulates quickly
Interest associated with the reverse mortgage revolves around the mortgage balance. If no payments are being made, equity is depleted very rapidly. The amortization schedule lenders provide is the best way to investigate how it works over time.