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Can you purchase a home with a reverse mortgage?

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 a 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) is allowed
  • Homes for purchase will be appraised to the FHA regulations and must meet FHA property guidelines

How does a reverse mortgage 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

Rotating question markFrequently Asked Questions About Using a Reverse Mortgage to Purchase a Home

Q. Are seller concessions allowed?
A. No. Seller concessions are applicable to forward mortgages only.

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

A Chapter 7 bankruptcy (liquidation) does not preclude a mortgagor (borrower) from using a HECM to buy a house if at least two years have passed since the bankruptcy was discharged.

The mortgagor must have either re-established excellent credit or decided not to take on additional credit commitments during this period.

If the mortgagor can demonstrate that the bankruptcy was caused by extenuating circumstances beyond his/her control, and has since demonstrated a documented ability to manage his/her financial affairs responsibly, an elapsed period of less than two years, but not less than 12 months, may be acceptable.

A Chapter 13 bankruptcy does not preclude a borrower from using a HECM to buy a home as long as the lender documents that: one year has passed since the bankruptcy was filed; 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 the bankruptcy court to enter into the moratorium.
SOURCE: HECM Financial Assessment and Property Charge Guide

Q. Is seller financing permitted?

Q. 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 to provide a copy of the appraisal to the consumer.