A reverse mortgage is a loan that allows homeowners aged 62 or older to tap into the equity in their home without selling their home or increasing their monthly expenses. Although these loans are often used to cover basic living expenses and medical expenses, it is possible to use a “HECM to Purchase” reverse mortgage to purchase a new home. Here is a brief overview of how a HECM Reverse Mortgage for Purchase works.
Key points to remember
- A reverse mortgage allows homeowners aged 62 or over to access the equity in their property to pay for expenses such as basic living expenses and healthcare costs.
- Instead of paying a lender each month, the lender pays you a certain amount based on the equity you have built up in your home.
- The entire loan balance becomes due if you sell the home, move house, fall behind on property taxes, or die.
- A home equity conversion mortgage (HECM) is the Federal Housing Administration’s reverse mortgage program.
- A HECM to Purchase is a reverse mortgage that you can use to purchase a new principal residence.
What is a Reverse Mortgage?
After paying off your mortgage diligently for years (or decades), a large portion of your net worth could be tied to the value of your home. It can be a tricky financial situation for seniors trying to pay for day-to-day expenses, medical bills, home repairs, or anything else.
However, homeowners age 62 or older can convert some of their home equity into cash through a reverse mortgage. Instead of making payments to a lender, the lender pays you based on the equity in your home. Over the term of the loan, your debt increases while the equity in your home decreases. Eventually, when you sell, move or die, the proceeds from the sale of the home are used to pay off the loan.
What is a HECM?
A Home Equity Conversion Mortgage (HECM) is a reverse mortgage program insured by the Federal Housing Administration (FHA) and available through FHA-approved lenders.
The amount of money you can borrow through a reverse mortgage depends on the age of the youngest borrower, current interest rates and the lesser of the appraised value of the home, the HECM mortgage limit FHA ($970,800 in 2022) or sale price (applicable to HECM for purchase loans only).
HECMs account for the bulk of reverse mortgages lenders offer on homes worth up to $970,800 – beyond that, you’ll need a jumbo or “homeowner” reverse mortgage.
What is a HECM to buy?
A HECM to Purchase is an equity conversion mortgage that you can use to buy a home. Like standard HECMs, the age limit of 62+ applies, and you don’t have to repay the loan until you sell the house, move out, die, or default on the loan ( for example, behind on your property taxes or home insurance).
The home you buy with the proceeds of a HECM for purchase must be your primary residence that you occupy within 60 days of loan closing.
HECM for purchase closing costs are higher than other reverse mortgages. They include an initial mortgage loan insurance (MIP) premium equal to 2% of the value of the property, as well as various lender and third party fees such as loan origination fees, title insurance, registration fees. assessment, credit report fees and registration fees.
Unlike a regular HECM, you will also need cash to cover a large down payment. Overall, your upfront costs could be between 29% and 63% of the purchase price of the home, depending on your age.
For HECM loans to purchase, you must pay the difference between the HECM loan proceeds and the sale price of the home, plus closing costs.
Funds can come from your savings or from the sale of your old home or personal assets (e.g. stocks), but you cannot use “gap financing” or other types of bridge financing such as a credit card cash advance or vendor financing.
Here are some examples showing the minimum down payment required for a HECM loan for purchase, according to the National Reverse Mortgage Lenders Association:
|HECM for purchase deposit examples|
|Purchase price||Down payment — age 62||Down payment — age 67||Down payment — age 71||Down payment — age 75|
HECM for properties eligible for purchase
Any home you buy with a HECM for purchase must meet FHA property standards and flood requirements. Eligible property types include:
- Single-family homes (properties with one to four units)
- Manufactured houses (built after June 1976)
- Properties in Planned Unit Developments (PUD)
- New construction homes with a certificate of occupancy (CO) issued at closing
Can I use a reverse mortgage to buy a house?
Yes, you can use a HECM Reverse Mortgage for Purchase to purchase a principal residence. To qualify, you must be at least 62 years old and have cash to cover the down payment and closing costs.
What is the difference between a HECM and a reverse mortgage?
A reverse mortgage is for homeowners aged 62 and over who want to tap into the equity in their home without selling or moving. A Home Equity Conversion Mortgage (HECM) is the Federal Housing Administration’s (FHA) reverse mortgage program, which accounts for the bulk of the reverse mortgage market. HECMs are the only federally insured reverse mortgages.
What are the age restrictions for getting a reverse mortgage?
Homeowners must be at least 62 years old to qualify for a home equity conversion mortgage (HECM), the most common type of reverse mortgage. However, some exclusive (“jumbo”) reverse mortgages are available to homeowners from the age of 55.
Reverse mortgages, including HECM loans for purchase, involve substantial costs, making them a poor choice for many seniors. Some less expensive options include mortgage refinancing, home equity loans, or downsizing and pocketing the extra proceeds.
Still, if you decide a reverse mortgage is right for you financially, shop around to compare the costs. Mortgage insurance premiums are generally the same for all lenders, but expenses like loan origination fees, closing costs, service charges and interest rates tend to vary.