Can you use a Reverse Mortgage to buy a home?

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?

Age: 62
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.

 Age: 77
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.


Frequently Asked Questions

What is a reverse mortgage?

A reverse mortgage is a federally insured product that allows for homeowners, age 62 or older, the ability to access a portion of their home equity in the form of cash. This can be in the form of a lump sum, monthly award or line of credit.

Is the HECM the same as a reverse mortgage?

That is correct! HECM is short for: Home Equity Conversion Mortgage. It is the
same program as the federally insured reverse mortgage.

Does the bank take ownership of my home?

Absolutely not! This is merely a mortgage lien. Just like any traditional mortgage product, the title remains in your name.

Is this program only for people who are struggling financially?

Not at all. Although it helps many seniors on fixed incomes live more comfortably, many turn to this option for additional security in retirement.

Will I be leaving my children with debt?

You do not have to! Payments can be made toward a reverse mortgage, just like any other mortgage product. This program gives the borrower much more flexibility regarding repayment options.

If my loan balance is higher than my home value, how are my heirs impacted?

This is a non-recourse loan. This means the home stands alone for the debt, not the homeowner or heirs. It is a concern some share when they do not plan on making any payments toward the reverse mortgage loan over a vast span of years.

Is this loan program insured by the government?

Yes. The reverse mortgage program is regulated by H.U.D. (U.S. Department of Housing and Urban Development) and is insured by the F.H.A. (Federal Housing Administration). These entities set the guidelines lenders must abide by.


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