Seniors, want to purchase your new home with no monthly mortgage payments? Use A Reverse Mortgage.

Using a reverse mortgage to downsizeAre you over 62 and want to downsize?  Move to a townhome so you don’t have to do the yard work?  Move to a one-level home?  Move closer to your children?  Move to a larger home to have space for when the family comes to visit?  Do you want to move to your new home but don’t want to have monthly mortgage payments?  The HECM for Purchase program may be your financing option.

The FHA insured reverse mortgage program that allows those 62 and older to purchase their new home and then not have monthly mortgage payments is called  HECM (Home Equity Conversion Mortgage) for Purchase.  The features and terms as well as the steps for the HECM for Purchase are the same as with the regular reverse mortgage.  However, because it is a unique process, there are a few points you and all parties involved need to be aware of to make it a smooth transaction.

  • The properties that qualify for the HECM Home Purchase include single family, 1 to 4 family dwelling units if the borrower/owner resides in one unit, FHA approved condos, manufactured homes that meet HUD’s standards.
  • To run our calculations we use the lessor of the final appraised value, sales price, or FHA mortgage limit for a one-family residence.
    • If the purchase price is $190,000 and the appraised value is $200,000, we would use the $190,000.  Or if the purchase price is $210,000 and the appraised value is $200,000, we use the $200,000.
  • The proceeds available to the borrower are calculated the same way as with any reverse mortgage, having all the closing costs (origination and FHA MIP, reports, title and escrow/settlement fees) included in the loan so there are no out of pocket expenses other than the appraisal and potentially any inspections.  The Net Principal Limit is the amount available to the borrower.
    • Note: When I’m working with those exploring homes, I run several calculations at various possible home values so when the borrower and their real estate agent are looking for a home, they will have an idea of the home value and the cash the borrower will need at close.
  • The borrower will need to have the difference between the Net Principal Limit (loan amount) and the purchase price available.  For example:
    • If the purchase price and the appraised value is $200,000 and the Net Principal limit is $124,000, the borrower will need $76,000* to purchase the $200,000 home.
    •  If a borrower has $100,000 in funds they want to use to purchase the same $200,000 home, they could combine their $100,000 with the $100,000 from the reverse mortgage proceeds to purchase the home and then have $24,000 in their reverse mortgage line of credit when using the adjustable rate, LIBOR, program.  (The fixed rate requires you to pull all available funds at close.)
      • Borrowers must use cash on hand, cash from the sale, liquidation of assets or Gift funds (must meet HUD’s approved funding sources and source of funds needs to be documented).
        • The additional funds cannot come from Builder incentives, Seller financing, Seller contributions or concessions, any person or entity that financially benefits from the transaction or third party that is directly or indirectly reimbursed by any of the parties benefitting in the transaction or Credit Card advances, sweat equity, trade equity, rent credit.  Cannot use loan discount points, interest rate buy downs, closing cost down payment assistance, gifts or personal property given by the seller or any other party involved in the transaction.  Seller can pay their share of taxes and Home Owner Association fees if applicable.
  • The borrower may choose any of the options/interest rate options:
    • HECM Fixed Saver
      • For calculation purposes our rates change every week.  The rate cannot be confirmed until the week of closing.  However, we have a Principal Limit Rate Lock (on the index of the LIBOR which means we can use the rate at the time of application or closing, whichever is the most favorable to the borrower, to determine the loan amount available.)  For the process of planning how much will be available to the borrower, I initially use the rate and amount of the program chosen at the time of application.
  • Rather than using all reverse mortgage funds, more personal funds can be used for the purchase so the reverse mortgage can be set up with a Line Of Credit Option (HECM LIBOR option only)
  • Seller has to be the owner of record for 90 days prior to the date of the sales contract (based on when recorded).  (This is to protect against property flipping.)
  • Prior to completing an application HUD requires the Certification of Occupancy.
  • The Original Purchase Contract or Certified Copy of the Purchase Contract is needed for underwriting.
  • Counseling must be completed by a HUD approved HECM counseling agency that has been approved to provide reverse mortgage counseling.  Minnesota requires that the counselor be located in Minnesota.  We will provide a you a list of HUD approved counselors.
  • The property must be livable at the time of closing.  Any required repairs must be completed prior to closing by the seller – no repairs or repair set asides are allowed.
  • Funds are provided at closing, as there is no rescission period.Move closer to family using a reverse mortgage
  • The new property has to be the primary residence and occupancy must happen within 60 days of closing.
  • One’s existing home may be retained as rental property or if purchasing current home prior to the sale of existing home income verification will be required to document the ability to maintain both properties.  (This is prevent the practice of “buy and bail.”)

Using the reverse mortgage to finance the purchase of your new home may be your solution to meeting your goals without having a monthly mortgage payment.

*You may also need funds for property taxes, initial hazard insurance premium, home owner association dues, etc.

©2013 Beth Paterson, Beth’s Reverse Mortgage Blog, 651-762-9648

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