Reverse Mortgage Loan for Home Purchase
What is a Reverse Mortgage loan for Purchase?
Beginning on January 1, 2009, homebuyers 62 and older became eligible to use a Reverse Mortgage loan to purchase a principal residence as part of HUD's "HECM for Purchase Program." The loan program allows seniors to purchase a home and obtain a Reverse Mortgage loan at the same time, within a single transaction therefore eliminating the need for a second closing. The senior buyer / borrower would need around 50% down payment but with a Reverse Mortgage would not have a mortgage payment for as long as they occupy the property as their primary residence and continue to pay property taxes, homeowner's insurance and maintain the condition of the property.
How does the Reverse Mortgage loan work?
Same as any other mortgage loan except how it is repaid. One important feature of the Reverse Mortgage loan is that there is no loan repayment for as long as the borrowers or non-borrowing spouse meet the obligations of the loan by occupying the home as their primary residence and continuing to pay property taxes, homeowner's insurance and maintain the condition of the property. The interest incurred on the loan each month is added back to the principal balance. The loan balance grows over time. (A loan in reverse). When the last remaining borrower or eligible non-borrowing spouse moves from or sells the home, dies, or fails to meet the terms of the loan, the loan becomes due and payable. Typically, the homeowner or his estate has up to a year to sell the home to pay off the loan. Remaining equity is owned by the homeowner or his estate. If the home is valued less than the payoff the homeowner is protected through the non-recourse feature of the Reverse Mortgage which insures that the borrower will never have to repay in a due-and-payable scenario, more than the value of the home.
Why use a Reverse Mortgage loan to finance the purchase of a home?
When a person age 62 or older is moving and buying a home he is in the mode of setting himself up for retirement. Often the senior will choose to sell the home they have occupied for years in order to downsize or secure a home better suited to their lifestyle during retirement. The traditional options would be to pay cash or to get a regular forward mortgage. Paying cash depletes an asset and getting a forward mortgage has strict credit and income requirements as well as monthly payments. The Reverse Mortgage loan would allow them to purchase a home with an adequate down payment and finance the rest but with no mortgage payment. With the Reverse Mortgage, the senior homeowner is able to conserve his cash providing him with a more robust retirement. It's always important to understand that the borrower or non-borrowing spouse is still responsible for property taxes, homeowner's insurance and maintaining the condition of the property.
How does a Reverse Mortgage loan help in the househunting process / Realtor
The bottom line is that the Real Estate Professional, working with senior home buyers, has the ability to present a home that is priced two times the amount of cash they have to spend. This provides headroom with which to work in finding the house they want, by creating flexibility in the price range of homes for their consideration. The Reverse Mortgage produces a loan that is approximately a 50% LTV. So yes… if they have $100,000 to spend, they can look at a $200,000 home.
Example: Prospective Senior Buyer has sold his home and has $125,000 in cash. He is looking at homes in the $125,000 price range but can’t find something that suits him. He finally found a home that he likes, but it has a price tag of $250,000.
He could purchase that home with a Reverse Mortgage loan.
He puts his $125,000 down and finances the rest through a Reverse Mortgage loan. He now owns a $250,000 home that he contributed $125,000 of his own money, financed the rest and now he has NO monthly mortgage payment for the rest of his life. However, Borrower or non-borrowing spouse is still responsible for property taxes, homeowner's insurance and maintaining the condition of the property.
The buyer gets more than he ever hoped for and the Realtor becomes a hero!
Typical Reverse Mortgage Home Purchase Scenario
• HUD regulated, FHA insured.
• Borrower continues to own their home. Sell when they want or pass it on to their heirs.
• Monthly mortgage payments are NOT required, however, Borrower or eligible non-borrowing spouse is still responsible for the payment of property taxes, homeowner's insurance and maintaining the condition of the property.
• The loan amount is determined by HUD calculation using age of youngest borrower or eligible non-borrowing spouse, value of property and interest rate as factors. LTV is approximately 50% - 60%.
• Very few qualifying requirements – Homeowner must be 62 years of age minimum and must occupy the home as their primary residence
• Non-recourse loan – Borrower or Heirs will never pay the lender in a due-and-payable scenario, more that value of the home. When loan terminates, heirs may sell home and retain any remaining equity.
• Borrower is responsible for paying property taxes and homeowner’s insurance premiums, and maintaining the condition of the home.
• Condos must be FHA approved
• Gift money, sourced and seasoned, is OK but seller concessions are not allowed.
Real Life Scenarios
• Downsizing – A customer is selling the (big) home that he has owned for years. He desires to move into a smaller more convenient, less maintenance home. One which will be better suited for him right now in his stage of life. With a Reverse Mortgage loan he can sell his (big) house, use only a portion of his proceeds to put down on the new purchase and never have a monthly mortgage payment again. *
• Upsizing – A customer owns a house that is undesirable to him. Maybe it’s too small or in disrepair or in an area that he wishes to move away from. But, He has equity in the home which would be enough to serve as a down payment on a new home. With a Reverse Mortgage loan he could “upsize” to a new home to as much as double the value…and never have a monthly mortgage payment again. (two sales for a realtor) *
• Purchase a Second (Vacation) Home – A customer wants to purchase a second home. A weekend home at the lake or a getaway farm or a time share…or whatever. He can convert the equity in his primary residence into cash through a re-finance Reverse Mortgage loan and use this cash to purchase the second property. Now he can own both properties with no monthly mortgage payments on either one. *
• Family Living Together – A Reverse Mortgage loan always has to be the primary residence of the senior and in his name only, but, often times the senior purchases the home (with a Reverse Mortgage) and incorporates a family member “live in” arrangement to help as an in home living assistant. The family member enjoys a roof over their head in exchange for the in home assistance they provide for the senior. The senior does not incur the typical monthly expense of home health care and will never have a monthly mortgage payment again. *
• Gift Funds – HUD allows a Reverse Mortgage borrower to utilize gift funds from a family member to beused for the down payment. The same guidelines apply as any other FHA loan in that this money has to be sourced and seasoned. The advantage here is that a family member can help the senior by providing the down payment and from there.. no more monthly mortgage payments. *
• Multi Unit Properties – A Senior can purchase up to a four unit property with a Reverse Mortgage loan as long as one of the units is occupied by him as his primary residence. He can rent the other three, creating an income, and through the Reverse Mortgage never have a monthly mortgage payment. *
* Borrower or eligible non-borrower must meet the terms of the loan by continuing to pay property taxes, homeowner insurance and to maintain the condition of the home. It is important to know that if these terms of the loan are not met, the borrower or the eligible non-borrower will be faced with the loan becoming due and payable.