Reverse mortgage to purchase a home

House with a for sale signDid you know that a reverse mortgage can be used to purchase a home? And did you know that there is no required mortgage payment with a reverse mortgage? As of Jan 1 2009 the Department of Urban Development (HUD) allowed the use of reverse mortgages for a home purchase. The reverse mortgage, is also known as a Home Equity Conversion Mortgage (HECM). The reverse mortgage can cover 47 percent to 52 percent of the home's purchase price, and many of the closing costs can be rolled into the loan. The HECM for purchase program gives senior home buyers more purchasing power and doesn't drain all their assets for a home sale.

Borrower Eligibility

  • Youngest borrower/titleholder must be at least 62 years old
  • The home purchase must be a primary residence and occupied within 60 days of settlement
  • No other mortgage loan can be used to buy home. The HECM for purchase must be the only home loan
  • The borrower must meet the financial eligibility guidelines established by HUD

Property Eligibility

  • Only one-to-four unit properties may be financed with a HECM purchase loan
  • HUD/FHA approved condominiums are also eligible. Read more
  • Planned unit developments (PUD) are allowed
  • Homes for purchase will be appraised to the FHA regulations and must meet FHA property guidelines

How does it work?

The lending limit percentage is determined by using the age of the youngest borrower (or non-borrowing spouse) and the "expected interest rate". The FHA provides a lending chart to calculate the overall borrowing percentage available to the home buyer.

For example, let's say Bill is 70 and his wife is 62. Since Bette is the youngest borrower, Bette's age is used to calculate the "principal limit factor". The borrowing percentage is the intersection of the youngest borrower (or non-borrower's spouse) and the "expected interest rate". The formula is a bit screwy, but then again, it is the federal government's formula.

Now that you know the lending percentage, the total cash requirement is very simple. Bill and Bette desire warm weather, a pool and want to be closer to their daughter and their grandkids. They found a great house only minutes away from the kids, and they don't want a mortgage payment.

Home Purchase Price $300,000
Available Loan Amount $174,900
(Available Principal Limit)
Less Total Settlement Costs $(15,443)
Available Loan Proceeds $159,457
Cash Required To Close $140,543 ($300,000 - $159,457)
Monthly Mortgage Payment $ 0

Frequently asked questions about using a reverse mortgage to purchase a home

Are seller concessions allowed?

No. Seller concessions are applicable to forward mortgages only.

Can I get a reverse mortgage for a purchase with a Chapter 7 bankruptcy?

A Chapter 7 bankruptcy (liquidation) does not disqualify a mortgagor seeking to purchase a home with a HECM provided at least two years have elapsed since the date of the discharge of the bankruptcy. During this time, the mortgagor must have:
re-established good credit, or
chosen not to incur new credit obligations. An elapsed period of less than two years, but not less than 12 months, may be acceptable if the mortgagor:
can show that the bankruptcy was caused by extenuating circumstances beyond his/her control; and
has since exhibited a documented ability to manage his/her financial affairs in a responsible manner.

A Chapter 13 bankruptcy does not disqualify a mortgagor seeking to purchase a home with a HECM provided that the lender documents that:
one year of the pay-out period under the bankruptcy has elapsed;
the borrower’s payment performance has been satisfactory and all required payments have been made on time; and
the borrower has received written permission from bankruptcy court to enter into the mortgage transaction.
SOURCE: HECM Financial Assessment and Property Charge Guide

Is seller financing permitted?

No.

Is the FHA Amendatory Clause required?

Yes. An appraisal is required for all HECM transactions, including purchase transactions. The execution of the Amendatory Clause does not negate federal and state mandates on providing a copy of the appraisal to the consumer.

RELATED READING:

HECM program pros and cons - There are PRO's and CON's to the HECM loan program. Read more

How much money do you get from a reverse mortgage? - The total mortgage amount is first limited by the value of the house (or condominium) and the maximum loan limit. Read more

Reverse mortgage with bad credit - The Mortgagee (Lender) may consider the Borrower to have satisfactory credit if: the Borrower has made all housing and installment debt payments on-time for the previous 12 months and no more than two 30-day late mortgage or installment payments in the previous 24 months; and the Borrower has no major derogatory credit on revolving accounts in the previous 12 months. Read more

Reverse Mortgage Counseling and Education - Did you know that borrowers required to complete a counseling session prior to making mortgage application? Read more

Reverse mortgage financial assessment - Lenders are required to determine if you can meet your monthly payment obligations. Read more

Reverse mortgage to purchase a home - Did you know that you can purchase a home with a reverse mortgage? Read more

Reverse mortgage payment options - There are six different ways you can receive the proceeds from a reverse mortgage. Read more

Can you sell a house with a reverse mortgage? - The dilemma of selling a home occurs when the sales price is less than the loan balance. Read more

What is an HECM loan? - A HECM is a reverse mortgage. Read more