Using a reverse mortgage to purchase a new home has been an option since 2009. In 2009 the Federal Housing Administration introduced the Home Equity Conversion Mortgage for Purchase (HECM), which makes it easier for seniors to purchase a new home for themselves. While the overall number of these transactions and of Americans who are reaching retirement age continues to increase, the program has been underutilized. This is a great option for seniors that are looking at owning their dream home before they pass.
How Does It Work
A reverse mortgage for purchase combines a purchase with a reverse mortgage. In these cases, a homeowner has to be at least 62 years old. This streamlined process eliminates closing costs, helping make the acquisition of a new home, condo, or FHA-approved manufactured home faster for them. On the other hand, the buyer must be able to afford property taxes, homeowners’ association dues if any, insurance premiums, and other property expenses. Most of the time the buyer is use to paying these items since they have owned a home before. Many seniors use the HECM to facilitate the purchase of a new place to live without the taking on monthly mortgage payments which can be great for people on a fixed income.
While the reverse mortgage for purchase seems like an attractive alternative to conventional financing, there are a number of factors that a potential buyer should take into account before signing on the proverbial dotted line.
The purchaser is required to make a down payment. Often, this can be as much as 50% of the purchase price. The reason for this fees is that there is no equity in the new home purchase. It is this equity that is used in lieu of monthly payments. Additionally, these funds cannot be borrowed but can come from the sale of existing property, savings accounts, or other sources of investments or financial accounts.
Using this method to purchase a new property can be complex. Homeowners will still be required to pay taxes, keep the required insurance, and maintain the parcel in order to prevent foreclosure by the lender. Because there are no monthly payments, the overall balance is higher and compound interest accrues.
Additionally, if the borrower lives long enough, the underlying equity supporting the loan could be exhausted, which may result in a demand to repay the loan early. Individuals considering this type of financial move are required to receive mandatory free counseling from a third party or agency approved by the Department of Housing and Urban Development.
Is This The Right Step To Take?
As the economic climate continues to change and evolve, options, such as the reverse mortgage for purchase, may be a viable way to find a new home. It is important to remember that this may not be right for everyone. Doing the research first and defining one’s objectives is an important step in the process to ownership. Also make sure you talk to an investment or real estate attorney and asking their advice before signing any documents.