Can You Use a Reverse Mortgage to Purchase a Home?

How HECM for Purchase Works

A reverse mortgage allows homeowners to convert home equity into cash without new monthly payments. While traditional reverse mortgages are for existing homeowners, the Home Equity Conversion Mortgage (HECM) for Purchase extends this to buying a new residence.

The HECM for Purchase offers a solution for eligible seniors to buy a new primary residence and obtain a reverse mortgage in a single transaction. Buyers can acquire a new home and immediately benefit from the cash flow advantages.

This distinct loan structure combines the purchase of a new home with the features of a reverse mortgage. Instead of securing a traditional mortgage with ongoing monthly payments, the HECM for Purchase requires a significant upfront cash contribution from the borrower. The reverse mortgage then covers the remaining balance of the home’s purchase price, eliminating the need for regular mortgage installments.

Interest accrues on the outstanding loan balance over time, increasing the amount owed. However, the loan only becomes due and payable when the last borrower permanently leaves the home, whether due to sale, death, or relocation. This structure provides financial flexibility, allowing individuals to maintain their independence and manage their finances without a recurring housing payment.

Borrower and Property Qualifications

Eligibility for a Home Equity Conversion Mortgage (HECM) for Purchase requires specific criteria to be met by both the prospective borrower and the property itself. Meeting these qualifications ensures the loan adheres to federal guidelines and provides appropriate consumer protections.

Borrowers must be at least 62 years of age to qualify for a HECM for Purchase. This age requirement applies to all individuals listed on the loan, ensuring that the program serves its intended demographic of older adults. Additionally, the property being purchased must serve as the borrower’s primary residence.

A mandatory requirement for all HECM borrowers involves attending a counseling session. This session must be conducted by an independent, U.S. Department of Housing and Urban Development (HUD)-approved counseling agency. The counseling aims to ensure borrowers fully understand the implications, costs, and alternatives associated with a reverse mortgage.

Specific property types are eligible for a HECM for Purchase. These typically include single-family homes, one-to-four unit properties with one unit occupied by the borrower, and approved condominiums or townhouses. The property must also meet certain Federal Housing Administration (FHA) minimum property standards.

Financial Aspects of the Loan

The “Principal Limit” is the maximum amount of loan funds available to the borrower. This limit is determined by several factors, including the age of the youngest borrower, prevailing interest rates, and the lesser of the home’s appraised value or the purchase price.

Borrowers are required to make a substantial down payment when utilizing a HECM for Purchase. This initial cash contribution typically ranges from approximately 40% to 60% of the home’s purchase price, depending on the borrower’s age and current interest rates. The funds for this down payment must come from an eligible source, such as savings, the sale of a previous home, or other approved assets.

Several costs are associated with originating a HECM for Purchase, similar to traditional mortgage transactions. These can include an origination fee, which is capped by federal regulations at a maximum of $6,000 for higher-value homes or a percentage of the maximum claim amount for lower-value properties. Additionally, borrowers pay a mortgage insurance premium (MIP), consisting of an upfront premium and an ongoing annual premium.

Other closing costs encompass various fees for services rendered during the loan process, such as appraisal fees, title insurance, recording fees, and attorney fees. While no monthly mortgage payments are required, borrowers remain responsible for ongoing property-related expenses. These responsibilities include maintaining the property, paying property taxes, and keeping current on homeowner’s insurance premiums.

Applying for and Closing the Loan

The process of securing a Home Equity Conversion Mortgage (HECM) for Purchase begins with a mandatory counseling session. This session, conducted by a HUD-approved counselor, informs prospective borrowers about the features, costs, and responsibilities of a reverse mortgage, and discusses alternatives.

Following counseling, the application involves submitting various financial documents to the lender. This includes proof of income, asset statements, and credit history to assess the borrower’s capacity to meet ongoing obligations like property taxes and insurance. The lender uses this information to determine eligibility and calculate the Principal Limit.

A crucial step is the property appraisal, which establishes the home’s fair market value and confirms it meets FHA minimum property standards. An independent appraiser assesses the property’s condition and value, impacting the final loan amount. Concurrently, the lender’s underwriting department reviews the borrower’s financial assessment and the property’s eligibility.

Once underwriting is complete and the loan approved, the transaction moves to closing. At closing, all parties sign the necessary legal documents, including the loan agreement and deed. Funds are then disbursed, finalizing the home purchase, and the reverse mortgage lien is recorded.