A reverse mortgage purchase loan enables seniors to finance a home purchase with no mortgage payment. Sound crazy? Read on and learn about one of the best kept secrets in the mortgage industry. Very few seniors or realtors even know about this program. But if you’re at least 62 years of age, a reverse mortgage purchase loan could be a fantastic way to buy your next home. Instead of paying 100% cash to avoid a mortgage payment, the lender will finance part of the purchase price with zero mortgage payment. This leaves more money in your pocket to fund your retirement lifestyle.
Intrigued? I hope so! Let me explain how this program works.
How a Reverse Mortgage Works
Before we dig into how a purchase money reverse mortgage works, let’s go over some reverse mortgage basics. There is a lot of misinformation floating around out there, so I want to set the record straight.
The most common reverse mortgage in the United States today is the home equity conversion mortgage, or HECM (often pronounced heck-um by industry insiders). If somebody you know recently got a reverse mortgage, it’s likely they got a HECM.
The HECM program was 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 HECM is designed to give seniors 62 or older the ability to borrow against their home equity without a mortgage payment or giving up ownership of the home. No mortgage payments are required as long as at least one borrower or non-borrowing spouse is living in the home and paying the required property charges.
You always retain title ownership of the home and are free to will it to your heirs. Your heirs will inherit any remaining equity in the home whether they wish to keep it, sell it, or let the lender sell it.
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. 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 has an annual interest rate. If you choose not to make a mortgage payment (which is the whole point, right?), any accrued interest is added to the loan balance over time.
Interest rates on HECM reverse mortgages are comparable to or slightly higher than traditional 30-year fixed mortgage rates.
How the Reverse Mortgage Purchase Loan Works
Though it’s a little counter intuitive, the purchase money reverse mortgage is actually quite simple. The bank finances a portion of the purchase price with no mortgage payment and you bring the rest plus closing costs as your down payment.
Your responsibility is to pay the property charges (property taxes, homeowner’s insurance, etc) and live in and maintain the home. As long as at least one borrower or non-borrowing spouse is doing that, no mortgage payments are required.
You always remain the owner of the home and you’re free to leave it to your heirs.
How Much Down Payment Do I Need?
Your down payment is based on the purchase price, age of the youngest borrower (or non-borrowing spouse), and the expected interest rate. There is no set down payment amount that applies to every borrower. For most borrowers, the down payment is usually somewhere between 40% to 50% of the purchase price.
You will also need to cover closing costs, which typically include third party costs (title, escrow, appraisal, etc.), origination fees (charged by the lender) and IMIP (which is charged by FHA to insure the loan).
If you’d like to calculate a down payment estimate, feel free to check out our reverse mortgage purchase calculator.
Why the HECM for Purchase is a Great Program
Let’s think about what this program enables you to do. A HECM purchase loan enables you to finance roughly half (more if you’re older) the purchase price of a home without a mortgage payment. You don’t have to buy with cash to avoid a mortgage payment. The HECM enables you to avoid a mortgage payment and keep more cash in the bank to fund your retirement lifestyle.
The HECM also enables you to effectively double your purchasing power. In a “normal” world, if you have $100,000 to buy a house and you don’t want a mortgage payment, you’re limited to buying homes priced at $100,000 or less. But if you can finance half the purchase price with no mortgage payment, you can now spend up to $200,000 for a home and still have no mortgage payment. The HECM for purchase significantly increases your purchasing power.
Realtors, are you paying attention?