The HECM for purchase is one of the best kept secrets in the mortgage lending industry. The HECM enables seniors to finance the purchase of a home without a mortgage payment. Sound crazy? Read on! I will explain.
What is a HECM?
The acronym HECM stands for home equity conversion mortgage. The HECM is the official FHA-insured reverse mortgage that enables seniors 62 or older to convert home equity into cash.
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 remain the owner of the home and can leave it to your heirs. Your heirs can keep the home by paying off or refinancing the reverse mortgage balance. Or, your heirs can either sell the home or allow the lender to sell it. The remaining equity in the home is paid to your heirs once the reverse mortgage is paid off.
The HECM is a non-recourse loan. That means the most that will ever have to be repaid is the value of the home. If the home is not worth enough to settle the entire mortgage balance, FHA will settle up the shortage.
The HECM is a mortgage, therefore it has an interest rate like any other mortgage. Interest rates are usually comparable to traditional 30-year mortgage rates.
If you choose not to make a mortgage payment, then the interest simply accrues onto the loan balance over time. This is how the HECM converts equity into cash. It shifts the burden of a mortgage payment from your income onto the equity in your home. In a sense, the home is now paying the mortgage payment so you don’t have to.
What is a HECM for purchase?
Most people know the HECM reverse mortgage as a tool to tap into the equity of a home you already own. However, not many people know you can also use it to buy a home.
How it works is very simple: the bank finances a certain dollar amount and you bring in the rest as your down payment. Again, 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.
How much is my down payment?
The size of your down payment depends on how much you qualify for. How much you qualify for depends on several factors, including home value, age of the youngest borrower (or non-borrowing spouse), current interest rates, and the HECM program you select.
The HECM tends to offer more money when interest rates are low, which means your down payment is lower when interest rates are low.
Older borrowers tend to qualify for more than younger borrowers, which means older borrowers can make smaller down payments than younger borrowers.
Most HECM borrowers tend to qualify for between 45% to 55% of the purchase price of the home. That means the typical borrower will need a down payment of 45% to 55%, depending on age and current interest rates.
If you’d like to get a down payment estimate, check out our HECM for purchase calculator.