Using a reverse mortgage (HECM) to buy a home began with the passage of the Housing and Economic Recovery Act of 2008. Before this, if a homeowner in retirement wanted to relocate, qualifying for the new home often proved difficult. They would have to be eligible to purchase a home though traditional means, qualify and obtain a traditional forward mortgage if they couldn’t pay cash for the home, establish their residency, and then refinance with a HECM.
The ability to use a Reverse Mortgage to purchase a home is no longer “new”, yet the public is still in the dark. Clearly, the Home Equity Conversion Mortgage (HECM) is more versatile than anyone realizes. For many seniors, financial planners, and even Realtors, the concept of purchasing a home with one is completely foreign.
Older homeowners often find themselves wanting to, or needing to, relocate to be closer to family, downsize to a more manageable home, or even upsize to a retirement dream home on the beach, golf course, or active adult community.
In a HECM for Purchase, the lender will still be able to provide the same principal limit to the borrower as is customarily available with a Reverse Mortgage. Instead of giving the funds to the borrower, however, the funds are generally applied to the sales price of the new home. Depending on the age of the youngest participant, and the effective interest rate, a lender may be able to contribute principal limits of 30% to 75% of the home value toward the purchase of that home.
Basically, the downpayment for the home will be the difference between the Initial Principle Limit and the purchase price. Then, the home will be owned with the HECM in place, and no mortgage payments will ever be required.
When selling a home and relocating, homeowners may find that this program allows them to have cash reserves upon relocating. Many will even use the remaining funds to supplement their retirement savings.
HECMs are specifically designed to be offered only for a borrower’s “Principal Residence.” This means that HUD will require the borrower to occupy the home within 60 days. Also, be aware that many mistakes can be made when the Realtor writes the sales contract. So make sure the Realtor understands HUD’s guidelines related to new construction and seller-paid closing costs for Reverse Mortgages.
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