A reverse mortgage can also be used to help someone purchase a home. In this type of reverse mortgage, known as an HECM for Purchase, the homebuyer provides a down payment and borrows the balance due without any obligation to make a monthly mortgage payment. It’s important to understand how an HECM for Purchase works, the requirements to qualify for this type of loan, and the pros and cons if you are considering this option.
How To Buy a House With a Reverse Mortgage
To fully understand the HECM for Purchase process, it’s necessary to first thoroughly understand what an HECM is. The majority of reverse mortgages issued in the U.S. are HECMs. The distinguishing characteristic of HECMs is that they are insured by the Federal Housing Administration (FHA), which is part of the U.S. Department of Housing and Urban Development (HUD). Many HECMs are used to supplement the borrower’s income. The amount that can be withdrawn against the equity the borrower has in the home depends on a number of factors, including:
The current interest rateThe age of the youngest borrower or eligible non-borrowing spouseThe lesser of the appraised value of the home, the sales price, or the HECM FHA mortgage limit ($970,800 in 2022).
The HECM for Purchase process allows a borrower to use a home equity conversion mortgage to buy a home using the proceeds from the reverse mortgage. The biggest benefit of an HECM for Purchase, also known as Reverse for Purchase, is the flexibility you’ll have to repay as much or as little of the loan as you wish each month—or to make no monthly payments at all. As Gabe Bodner, a Denver-based mortgage specialist at The Rueth Team of Fairway Independent Mortgage, told The Balance by phone, an HECM for Purchase lets borrowers afford the home they want while allowing their savings to continue growing for retirement. “If you use a reverse mortgage strategically, you can still make a mortgage payment and gain equity while preserving your other assets, like an IRA or 401(k),” Bodner said. “By not using those prematurely, you can potentially save in taxes and penalties as well, ultimately providing more assets to give you a higher probability of financial success in retirement.” You do need to have enough cash to make a substantial down payment on a home purchase, however—typically between 45% and 62% of the purchase price, depending on buyer’s age or the eligible non-borrowing spouse’s age. The amount of down payment necessary is calculated by HUD. Here are some examples of the minimum down payment required for homes with various prices.
Pros and Cons of Using an HECM for Purchase
Pros Explained
Maximizes your purchasing power: An HECM loan can be added to proceeds from a home sale or cash on hand to help someone afford to purchase the home they desire.Supplements cash flow: An HECM for Purchase does not require a borrower to make a monthly mortgage payment, allowing that money to be used for daily expenses.Preserves retirement and other savings for growth: Instead of using savings in an IRA or 401(k) to help purchase a home, a borrower can continue to let those investments grow and also avoid being taxed on withdrawals.
Cons Explained
Only borrowers over age 62 can qualify: HECM for Purchase has the same age requirements as a traditional home equity conversion mortgage. According to Bodner, a proprietary reverse mortgage is available to borrowers 55 and older. Additional costs include an upfront mortgage premium: An HECM for Purchase includes a 2% mortgage premium that must be paid at closing. Alternatives to an HECM may be more affordable. Loan repayment requirements: As with any HECM, the loan must be repaid if the borrower stops using the home as a primary residence or fails to meet loan obligations such as paying property taxes or home insurance costs.
How To Get an HECM for Purchase
The FHA requires borrowers who are interested in obtaining an HECM for Purchase loan to complete a counseling program to determine if it is the right fit. Counselors will review program eligibility requirements and explain the financial implications of this loan. They also want to make sure that borrowers understand the provisions of loan repayment and consider options that may be a better fit. The FHA provides an online search tool for finding an HECM counselor. You can also explore the list of all FHA-approved lenders (check the box that says “reverse mortgages”). If you meet the criteria for an HECM loan, this list of lenders is the starting point to getting an HECM for Purchase loan. You can also ask an HECM counselor for a list of lenders. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
