Home Buying in Reverse: HECM for Purchase Loan
If you are a homeowner 62 years or older the Home Equity Conversion Mortgage (HECM) for Purchase loan may help your next home without required monthly mortgage payments.
Why Buy a New Home as a Senior?
Having a multiple-level home with several rooms and a huge garden may now take more work than you are willing to put in to maintain it and, if you are retired, you may prefer to downsize to a smaller, more manageable home. Or perhaps you need a home that caters to new physical needs, such as a one-level home with ramps or handrails and wider doorways.
The allure of a warmer climate may be attractive, or you may simply choose to move closer to the rest of your family. Whatever your reasons, there is a viable option available to you for aging in a new home instead of your current one.
The HECM for Purchase
In the early 1980’s, a new loan product called a reverse mortgage was approved to be insured by the Federal Housing Administration (FHA). This government-insured home equity loan, more specifically called a Home Equity Conversion Mortgage (HECM), was developed exclusively for seniors and signed into law in 1988. The financial tool became one of the only methods that allowed senior homeowners access to a portion of their equity without having to leave their home or add to their monthly expenses.
In 2008, the loan evolved to include a new variation that allowed senior homeowners the same advantages of the traditional HECM reverse mortgage but added the option of purchasing a new home as well. This loan was called the HECM for Purchase and, with the type of financing it offers, it may be just the answer you are looking for.
How Does It Work?
The HECM for Purchase is a solution that allows you to accomplish two goals in just one transaction: to attain a more fitting principal residence and to obtain a reverse mortgage. This can save you money since you incur only a single set of closing costs because it consolidates two financial transactions—purchasing a home and financing it with a reverse mortgage loan—into one.
With the HECM for Purchase reverse mortgage, the borrower provides a down payment using the sale of the previous home or other savings. The equity earned through the down payment and the new home’s value is then used to calculate the reverse mortgage loan amount. During this process, borrowers may need to meet the loan-to-value ratio requirements with a significant down payment and provide verification of personal income and funds. All or part of the reverse mortgage funds then cover the remaining cost of the home, just like with a traditional mortgage.
The benefit to financing with a reverse mortgage is that instead of paying the loan back every month over time like a traditional mortgage, reverse mortgage repayment is deferred to when the loan matures. This way, senior borrowers on a fixed income can finance the purchase of a new home without the burden of having to make monthly mortgage payments. Borrowers are responsible for paying property taxes, homeowner’s insurance, and for home maintenance.
For example, Bob and Mary, both 68 years old, want to buy a lower maintenance home. They work with a real estate broker to sell their current residence and look for a new home that fits their needs.
The real estate broker introduces Bob and Mary to a reverse mortgage advisor. The advisory shows the buyer how the HECM for Purchase loan could provide the funds they need for their new home.
Bob and Mary sell their home in Florence for $350,000 that they own free and clear. They plan on moving to Arizona to be closer to family. They find their ideal home and purchase it for $300,000. With an estimated settlement cost of $10,673 the loan amount on their new home would be $125,227 and they would put $174,773 cash from the sale of their Florence home in by closing. Not only would they have no monthly payments, but they would also be keeping over $170,000 in cash from their closing of their Florence home.
One benefit of a HECM for Purchase reverse mortgage loan is that it allows you to avoid using all your retirement assets to buy a new home. You can also refrain from using your fixed monthly income on a monthly mortgage payment, which is typical of traditional mortgages. With a HECM for Purchase, borrowers have access to a financial tool that helps them to: avoid draining assets, acquire a more fitting home, and age there with no monthly mortgage payments. Borrowers are responsible for paying property taxes, homeowner’s insurance, and for home maintenance.
What are the eligibility requirements?
· To be eligible for a HECM loan, some key requirements are:
· Youngest borrower must be at least 62 years of age or older
· You must live in your home as your primary residence and have sufficient equity
· You cannot be delinquent on any federal debt
· Property must be a single-family residence, an owner-occupied 2-4 unit home, a condominium approved by HUD or a manufactured home that meets FHA guidelines
· Must meet financial assessment requirements as established by HUD
How do I Start?
To get started first we need to establish what your current home is worth and put it on the market. You also need to discuss the HECM with a reverse mortgage adviser. Give me a call at 541-999-96888. I can guide you with your current property and put you in contact with an experienced reverse mortgage adviser.
Laura Wilson, Broker
Windermere Real Estate, Florence Oregon