Can You Purchase a Home With a Reverse Mortgage?

It is possible to use a reverse mortgage to purchase a home, a process facilitated by a Home Equity Conversion Mortgage (HECM) for Purchase. This program allows eligible individuals to acquire a new primary residence while integrating the unique benefits of a reverse mortgage. Unlike traditional mortgages that require ongoing monthly payments, a HECM for Purchase is designed to provide financial flexibility for seniors. This option enables a significant portion of the home’s purchase price to be financed without the burden of regular mortgage installments.

Understanding HECM for Purchase

A Home Equity Conversion Mortgage (HECM) for Purchase is a specialized reverse mortgage for individuals aged 62 or older buying a new primary residence. It allows for the purchase of a new home and the establishment of a reverse mortgage in a single transaction. This integrated approach can significantly reduce the upfront cash needed compared to an all-cash purchase, while still providing reverse mortgage benefits.

The borrower owns the home, with a portion of the purchase price financed by the HECM loan. A key characteristic is that it does not require monthly mortgage payments, unlike conventional home loans. However, the borrower remains responsible for property taxes, homeowner’s insurance, and maintaining the home.

The HECM for Purchase program is insured by the Federal Housing Administration (FHA) and regulated by the U.S. Department of Housing and Urban Development (HUD), offering consumer protection. This insurance protects both the borrower and the lender, ensuring that the loan will not exceed the home’s value at the time of repayment. The loan balance only becomes due and payable when the last borrower permanently leaves the home, whether by selling the property, moving out, or passing away.

Borrower and Property Requirements

To qualify for a HECM for Purchase, both the borrower and property must meet specific FHA criteria. All individuals on the loan must be at least 62 years old; the youngest borrower’s age is a primary factor in determining the available loan amount. The home being purchased must serve as the borrower’s primary residence, and they are typically required to occupy the property within 60 days of the loan closing.

A financial assessment is also conducted to ensure the borrower’s capacity and willingness to meet ongoing financial obligations. This assessment evaluates income, credit history, and residual income to determine the borrower’s ability to consistently pay property taxes, homeowner’s insurance, and maintain the home.

A mandatory component of the application process is attending a counseling session with a HUD-approved independent counselor. This session provides an overview of the HECM program, outlining its mechanics, borrower obligations, and alternatives. Upon completion, a counseling certificate is issued, which is a necessary document for the loan application.

The property itself must also satisfy certain FHA requirements. Eligible property types generally include single-family homes, as well as two-to-four-unit properties where the borrower occupies one of the units. FHA-approved condominiums, townhomes, and certain manufactured homes that meet specific HUD standards are also typically permitted.

Furthermore, the property must meet the FHA’s Minimum Property Standards, which ensure the home is safe, structurally sound, and secure. An appraisal is conducted to verify these standards, addressing any major deficiencies that could impact health, safety, or the property’s integrity.

Steps to Obtain a HECM for Purchase

The process of securing a HECM for Purchase involves several distinct stages, from initial research to closing. A first step involves identifying a HECM lender, preferably one with experience in HECM for Purchase transactions, to discuss pre-qualification and potential loan amounts. This initial consultation helps prospective borrowers grasp the financial parameters based on their age, prevailing interest rates, and the estimated value of the home they intend to purchase.

All prospective borrowers must complete a mandatory counseling session with a HUD-approved independent counselor. Upon successful completion, the counselor issues a certificate, a prerequisite for proceeding with the formal loan application.

With the counseling certificate in hand, the next phase involves actively searching for a new home and making an offer. It is beneficial to work with a real estate agent who understands HECM for Purchase transactions, as the offer must clearly specify that a HECM loan will be utilized for financing.

Once an offer is accepted, the loan application package is submitted to the chosen HECM lender. This stage includes a comprehensive appraisal process, where a HUD-approved appraiser assesses the home’s value and confirms it meets FHA minimum property standards. Concurrently, the lender conducts a financial assessment, evaluating the borrower’s income, credit history, and residual income to ensure their ability to meet ongoing property charges.

The final stage is the closing, where all loan documents are signed. The borrower is required to bring their significant cash contribution, encompassing the down payment and any closing costs not financed, to this meeting. Lenders verify the source of these funds, ensuring they come from acceptable sources such as the sale of a previous home or personal savings. After the closing, the loan is funded, and the borrower officially takes ownership of their new home.

Financial Considerations and Ongoing Responsibilities

A HECM for Purchase involves specific financial considerations, including significant upfront costs and continuing obligations. Borrowers are required to make a substantial cash contribution at closing, typically ranging from 40% to 70% of the home’s purchase price. This percentage is influenced by factors such as the borrower’s age and prevailing interest rates, with older borrowers generally qualifying for a larger loan amount and thus a smaller cash contribution.

Closing costs for a HECM for Purchase are similar to traditional mortgages but also include unique reverse mortgage-specific fees. An initial Mortgage Insurance Premium (MIP) of 2% of the home’s value or the FHA maximum claim amount, whichever is less, is paid upfront. Additionally, an annual MIP of 0.5% of the outstanding loan balance accrues over the loan’s life. Origination fees, which compensate the lender, are FHA-capped. Other typical closing costs include appraisal, title insurance, recording, credit report, and counseling fees, which can total between $9,000 and $35,000. Many of these costs, including the initial MIP and origination fees, can often be financed into the loan, reducing the immediate out-of-pocket expense.

Interest accrues on the HECM loan balance over time, increasing the total amount owed. As no monthly payments are required, this interest is added to the principal balance, causing the loan to grow. This means interest is calculated on the initial borrowed amount and previously accrued interest.

Maintaining the loan in good standing requires adherence to ongoing responsibilities. Borrowers must consistently pay property taxes, homeowner’s insurance premiums, and any applicable homeowner association fees. The home must be maintained in good condition according to FHA standards and remain the borrower’s primary residence. Failure to meet these obligations can result in the loan becoming due and payable.

The HECM loan becomes due and payable when the last borrower permanently leaves the home, such as by selling the property, moving out, or passing away. The property is typically sold, and the proceeds are used to repay the loan. A significant protection for borrowers and their heirs is the non-recourse nature of the HECM, meaning the amount owed can never exceed the home’s value at repayment. Any shortfall between the sale price and the loan balance is covered by FHA insurance.