If you’re over 62, it’s possible to finance a home purchase with no mortgage payment using a reverse mortgage for purchase. You bring your down payment to closing and the bank finances the rest with no mortgage payment. If that sounds crazy, read on! We’ll explain how it works and the possible pros and cons.
The purchase reverse mortgage is a best-kept secret of the mortgage industry, in my opinion. It’s a great way to finance a home purchase in retirement, but few people really even know about it. It increases your purchasing power, improves your monthly cash flow, and helps you keep more money in the bank to help protect your lifestyle and financial security in retirement.
There is a lot of misinformation out there about reverse mortgages. Let’s cover a few basics, then we’ll dig into some reverse mortgage for purchase specifics and pros and cons.
Table of Contents
- What is a Reverse Mortgage?
- How a Reverse Mortgage Works
- How Does a Reverse Mortgage for Purchase Work?
- Reverse Mortgage Purchase Pros and Cons
- How Much Of a Down Payment Will I Need?
What is a Reverse Mortgage?
The most common reverse mortgage in the United States today is the FHA-insured home equity conversion mortgage, or HECM (or “heck-um”, as industry professionals call it). If somebody you know recently got a reverse mortgage, they likely got a HECM.
The HECM, or home equity conversion mortgage, was signed into law by President Reagan as part of the Housing and Community Development Act of 1987. The Federal Housing Administration (FHA) insures and regulates the HECM under the authority of the Department of Housing and Urban Development (HUD).
Over 50,000 seniors get HECMs every year in America today. That number will likely grow as more seniors learn about the potential benefits of a reverse mortgage.
How a Reverse Mortgage Works
If you’re 62 or older, the reverse mortgage enables you to tap into home equity and use it to enhance your retirement lifestyle and financial security.
You always remain the owner of your home, which means you can leave your home to your heirs. Your heirs have the option to either keep the home or sell it. If your heirs wish to keep the home, they can pay off or refinance the loan balance. If your heirs don’t want the home, they can sell it themselves or let your lender sell it.
The reverse mortgage is a non-recourse loan; the most that will have to be repaid is the value of your home. FHA covers any shortage if your home isn’t worth enough to pay off the entire loan balance.
The reverse mortgage is also flexible and customizable. Your lender can tailor it to your individual financial goals and needs.
If you already own your home, you can use the reverse mortgage to tap into home equity without a mortgage payment or selling the home. This is the most common way seniors use a reverse mortgage. The payout options available include lump sum, line of credit, term/tenure income, or a combination of all of these.
And, of course, you can use a reverse mortgage to finance a home purchase without a mortgage payment. That’s what we’ll cover in more detail next.
How Does a Reverse Mortgage for Purchase Work?
As I’ve mentioned, the most common way people use a reverse mortgage is to tap into the equity of a home they already own. Relatively few people (including real estate professionals) know that you can also use a reverse mortgage to buy a home. The concept is pretty simple: your lender finances a certain amount and the rest plus closing costs is your down payment.
Again, there are no mortgage payments as long as at least one borrower (or non-borrowing spouse) lives in the home and pays the property charges.
The size of the down payment depends on how much you qualify for. How much you qualify for depends on a few different factors, including purchase price, age of the youngest borrower (or non-borrowing spouse), expected interest rate, and the reverse mortgage program you select.
The reverse mortgage tends to offer more money when interest rates are lower. In other words, purchase reverse mortgage down payments tend to decrease as interest rates fall.
Older borrowers tend to qualify for more than younger borrowers. This means that older borrowers will usually have smaller down payments than younger borrowers.
Most reverse mortgage applicants qualify for between 35% to 50% of the purchase price in today’s market. This means that the typical applicant will need to put down around 50% to 65% of the purchase price plus closing costs, depending on age and current interest rates.
If you’d like to get a down payment estimate, check out our reverse mortgage for purchase calculator.
Reverse Mortgage Purchase Pros and Cons
The reverse mortgage for purchase is a great financing option, in my opinion. I think anybody who looks at it objectively will come to the same conclusion. However, that doesn’t mean it’s always the perfect fit. Let’s cover some potential reverse mortgage for purchase pros and cons. My goal is to flesh out the potential positives and negatives to make it easier for you to decide if a purchase reverse mortgage makes sense for you.
I think a purchase reverse mortgage offers some great benefits, so in my mind, the positives greatly outweigh any negatives. It offers increased purchasing power, improved monthly cash flow, and it helps you keep your cash in the bank to help protect your retirement lifestyle.
- More home purchasing power. The reverse mortgage for purchase potentially allows you to buy more home than you could otherwise afford. Remember, you’re financing with no monthly payment. You’re not limited by your cash position or how much of a payment you can afford. For example, let’s say you have just $300,000 to buy a home and you want to avoid a mortgage payment. Normally, you could only buy a home priced at $300,000 or less. But what if you can finance part of the purchase price with no mortgage payment? That enables you to spend more than $300,000 and still not have a mortgage payment. The reverse mortgage for purchase significantly increases your purchasing power.
- Keep more cash in the bank. In a normal world, you have to pay 100% cash to avoid a mortgage payment. The reverse mortgage enables you to finance part of the purchase price without a mortgage payment. This means you don’t have to come up with 100% cash to avoid a mortgage payment. Instead, you get to keep more cash in the bank where it can protect and preserve your retirement lifestyle and financial security.
- Improve your monthly cash flow. Again, there are no mortgage payments required. You get to keep more of your retirement income in your pocket for fun things instead of spending it on a mortgage payment for the next thirty years.
So, what are the possible downsides of a reverse mortgage for purchase? The most common criticism I hear is the closing costs. I’ve heard people mention other perceived downsides as well, but often they’re really not downsides per se. They’re more an issue of suitability. There are a lot of great financial products out there that may be a bad fit for you because they don’t fit your financial goals. That’s true of the HECM as well. If it’s not a good fit, it doesn’t mean it’s a bad product. It’s just not good for you specifically.
- Closing costs. This is the most common reverse mortgage criticism I’ve heard over the years. Yes, the closing costs can be high, but they’re not always high. A reverse mortgage usually has three categories of closing costs: IMIP, origination, and third party costs. How much they add up to depends on the purchase price, location, and current rates.
- Less home equity in the future. This isn’t really a downside, in my opinion. The whole point of the reverse mortgage is to convert home equity into cash. Of course you’re going to have less equity in the future than if you didn’t have a reverse mortgage. If you’re concerned about having less home equity in the future, a reverse mortgage may not be the right solution.
- Larger down payment. I don’t see this as a true downside, either. Yes, you can finance a home purchase with a smaller down payment, but you’ll likely end up with a mortgage payment as well. A reverse mortgage requires a larger down payment because there’s no mortgage payment. That’s not a downside, it’s just how it works. You have to weigh what makes sense for you, right? Should you put less down and pay a mortgage payment, or put more down and not have a mortgage payment?
There are some other unique situations where a HECM may not be the best fit. They don’t come up a lot, but if you’re interested, you can read about them here.
How Much Of a Down Payment Will I Need?
In my opinion, the reverse mortgage for purchase is a fantastic financing option. It offers greater purchasing power and improved monthly cash flow. It enables you to keep more money in the bank to help protect your retirement lifestyle and financial security. If you’d like to estimate your down payment, check out our reverse mortgage for purchase calculator.