Very few home buyers or realtors even know about this program, but if you’re at least 62 years of age, it could be a fantastic alternative to paying 100% cash to avoid the mortgage payment. This leaves more money in your pocket to finance your retirement lifestyle.
Think about it: home equity is a resource that is locked away and can’t be used for anything. You can’t take home equity down to the store and buy Christmas gifts for your grandchildren with it. You can’t buy plane tickets or new flooring for your house with it, right? Once you’ve sunk your money into home equity, it’s locked away and can’t be used for anything.
The beauty of the reverse mortgage is that you can purchase a home without a mortgage payment without having to lock up as much of your nest egg in unusable home equity. Instead of having to drain your retirement savings and pay 100% of the purchase price to avoid a mortgage payment, you can finance a large portion of the purchase price – and still have no mortgage payment. This leaves more of your nest egg in your pocket to fund your retirement lifestyle.
Intrigued? I hope so! Let me explain how this program works.
How the Purchase Money Reverse Mortgage Works
Before we dig into how a purchase money reverse mortgage works, let’s go over some reverse mortgage basics. If you’re like most people, you’ve probably heard a few things here or there about reverse mortgages, but don’t really know much about them.
The most common type of reverse mortgage in today’s lending marketplace is the home equity conversion mortgage, or HECM. If somebody you know recently got a reverse mortgage, it’s likely they got a HECM.
The HECM program was created and signed into law by President Ronald Reagan as part of the Housing and Community Development Act of 1987. Today, the program is overseen and regulated by the Federal Housing Administration (FHA) under the authority of the Department of Housing and Urban Development (HUD).
The idea behind the HECM is to give seniors 62 years of age or older the ability to borrow a large portion of their home’s value without having to make a monthly mortgage payment or give up ownership of the home. As long as at least one borrower is living in the home and paying required property charges, no monthly payments are required and the loan does not have to be paid back.
The borrowers always retain title ownership of the home and are free to will it to their heirs.
The HECM reverse mortgage is a non-recourse loan, which means the most that will ever have to be repaid is the value of the home – even if it’s not enough to settle the entire loan balance. If the home isn’t worth enough to settle the entire balance, the FHA mortgage insurance fund picks up the shortage.
Like any other mortgage, the HECM reverse mortgage has an annual interest rate. If the borrower chooses not to make a mortgage payment (which is the whole point), any accrued interest is simply added to the loan balance over time.
Interest rates on HECM reverse mortgages are typically very comparable to prevailing rates on traditional forward home loans.
Though it can seem a little counter intuitive, the purchase money reverse mortgage is actually quite simple. You bring your down payment and the bank finances the rest with no monthly mortgage payment. Again, you don’t need to pay the interest on the loan if you don’t want to; it simply accrues onto the loan balance over time.
Your responsibility is to pay your required property charges (property taxes, homeowner’s insurance, etc) and live in and maintain the home. As long as at least one borrower is doing, that, no payment is required and the loan balance doesn’t have to be paid back. It’s only when the last borrower permanently leaves the home that the loan balance has to be paid back.
And again, you always remain the owner of the home. You’re not giving up title ownership of your home when you get a HECM reverse mortgage (don’t let anybody tell you otherwise!).
How Much of a Down Payment Do I Need?
The purchase money reverse mortgage is a different animal than a traditional forward mortgage, which often has a set minimum down payment for pretty much every applicant. The down payment for a HECM varies because the loan amount you qualify for is based on the age of the youngest borrower, the purchase price of the home, and prevailing interest rates. For most borrowers these days, the down payment is usually somewhere between 40% to 50% of the purchase price.
If you’re actively shopping for a home, we suggest you contact a reputable HECM lender and have them crunch the numbers on how much of a down payment you’ll need. Note that there is some income and credit qualifying these days (see financial assessment), so don’t be surprised if the lender does an income and expense analysis and asks to run your credit.
The typical closing costs for a purchase money reverse mortgage are third party costs (title, escrow, appraisal, etc.), origination fees (which are charged by the lender) and IMIP (which is charged by FHA to insure the loan). These costs can vary somewhat from lender to lender, so it’s probably not a bad idea to shop with a few reputable lenders and see who can give you the best deal.
Note that FHA does not currently allow seller or lender credits to cover closing costs, but this could change in the future.