You made countless memories and raised a family in your home, but now that you’ve retired it may not be a perfect fit. Perhaps your family lives in another city and you want to be closer, or perhaps you always dreamed of living on the beach, a reverse mortgage could be an ideal solution to right-size your living situation.
A Home Equity Conversion Mortgage (HECM), or reverse mortgage, for Purchase is a reverse mortgage that allows seniors, age 62 or older, to purchase a new principal residence using loan proceeds from the reverse mortgage. This can benefit retirees seeking a cost-effective way to downsize their housing expenses, find a more suitable home for this season of life, or relocate to a more retirement friendly location.
The right home with the right mortgage
With a reverse mortgage for purchase Instead of paying all cash or taking out a traditional mortgage, you can finance part of the purchase price using a reverse mortgage— so there are no monthly mortgage payments.*
- Choose the home that is the right size for your retirement
- Put a portion of the new home’s sale price toward the reverse mortgage loan – the reverse mortgage will finance the remaining balance
- Live in your new home without the burden of a monthly mortgage payment
The difference of a reverse mortgage for purchase vs. a traditional mortgage
Most people are familiar with how traditional mortgages work, but the reverse mortgage for purchase solution is new to most. There are additional requirements for a reverse for purchase over a traditional mortgage, these include the borrower age, the repayment requirements, the down payment amount, eligible properties, and the protections from owing more than a home is worth. The following sections go into further detail on each.
Borrower age
A reverse mortgage for purchase solution is only available to home owners that are 62 years or older, whereas a traditional mortgage is available to anyone of legal age to enter a contract. This is a financial solution created exclusively for American retirees.
Repayment requirements
Using a reverse mortgage for purchase provides borrowers with flexible repayment feature — The borrower can choose to repay as much or as little as they like each month, or make no monthly principal and interest payments. The flexible repayment feature makes it easier for a buyer to afford the home they really want, preserve more savings and retirement assets, and improve cash flow. As with any mortgage, the borrower must keep current with property-related taxes, insurance and maintenance as part of their ongoing loan obligations. Repayment is generally required once they sell the home, pass away, move out or fail to meet their loan obligations.
With traditional mortgages monthly principal and interest payments are required. Of course traditional mortgages build equity as the loan is repaid, but these monthly payments may not be sustainable for retirees with limited retirement income.
Down payment amount
With a reverse mortgage for purchase, may have a down payment requirement of 45% – 62% of the purchase price, depending on the buyer’s age or eligible non-borrowing spouse’s age (this range assumes closing costs will be financed.) The rest of the funds for purchase come from the reverse mortgage loan. This allows the buyers to keep more assets to use as they wish, as compared to paying all cash, while still having the flexibility of no required monthly mortgage payments. Traditional mortgages typically require a smaller down payment.
Eligible properties
To be eligible for a reverse mortgage for purchase, the property must be one of the following types: single-family home; a two- to four-unit home with one unit occupied by the borrower; or a HUD-approved condominium. With new construction, a Certificate of Occupancy or equivalent must be obtained before applying.
Reverse mortgage for purchase options
There are several reverse mortgage for purchase options depending on your situation; the standard HECM, and HomeSafe, the proprietary reverse mortgage from Finance of America Reverse LLC (FAR). While each allows you to buy a home that fits your needs, the HECM has a cap of $726,525 while HomeSafe provides much higher loan amounts up to $4 million. With HomeSafe, condos valued at $500,000 or more do not require an FHA approval.
As with any financial decision, you should carefully weigh the benefits and risks before making a decision. Contact a FAR representative today to learn more about the benefits of reverse mortgages and how they may help you secure long-term financial freedom.
*The borrower must meet all loan obligations, including living in the property as the principal residence and paying property charges, including property taxes, fees, hazard insurance. The borrower must maintain the home. If the homeowner does not meet these loan obligations, then the loan will need to be repaid.
This article is intended for general informational and educational purposes only, and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.
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