Can you purchase a home with a reverse mortgage?
Did you know that a reverse mortgage can be used to purchase a home? And did you know that there is no required mortgage payment with a reverse mortgage?
As of January 1, 2009, the Department of Urban Development (HUD) allowed the use of reverse mortgages (also known as a Home Equity Conversion Mortgage, or HECM) for a home purchase.
The reverse mortgage can cover 47-52% of the home's purchase price, and many of the closing costs can be rolled into the loan.
The HECM for purchase program gives senior home buyers more purchasing power and doesn't drain all their assets for a home sale.
Borrower eligibility
- The youngest borrower/titleholder must be at least 62 years old.
- The home purchase must be a primary residence and occupied within 60 days of settlement.
- No other mortgage loan can be used to a buy home. The HECM for purchase must be the only home loan.
- The borrower must meet the financial eligibility guidelines established by HUD.
Property eligibility
- Only one-to-four-unit properties may be financed with a HECM purchase loan.
- HUD/FHA approved condominiums are also eligible.
- Planned unit developments (PUD) are allowed.
- Homes for purchase will be appraised to the FHA regulations and must meet FHA property guidelines.
How does a reverse mortgage work?
The lending limit percentage is determined by using the age of the youngest borrower (or non-borrowing spouse) and the "expected interest rate." The FHA provides a lending chart to calculate the overall borrowing percentage available to the home buyer.
For example, let's say Bill is 70 and his wife is 62. Bill and Bette desire warm weather, a pool and want to be closer to their daughter and their grandkids. They found a great house only minutes away from the kids, and they don't want a mortgage payment.
Since Bette is the youngest borrower, Bette's age is used to calculate the "principal limit factor." The borrowing percentage is the intersection of the youngest borrower (or non-borrower's spouse) and the "expected interest rate."
Now that you know the lending percentage, the total cash requirement is very simple.
Expense | Cost |
|---|---|
Home purchase price | $300,000 |
Available loan amount | $174,900 |
Total settlement costs | -$15,443 |
Available loan proceeds | $159,457 |
Cash required to close | $140,543 ($300,000 - $159,457) |
Monthly mortgage payment | $0 |
Frequently Asked Questions About Using a Reverse Mortgage to Purchase a Home
Are seller concessions allowed?
No — seller concessions are applicable to forward mortgages only.
Is seller financing permitted?
No, unfortunately seller financing is not permitted.
Is the FHA Amendatory Clause required?
Yes. An appraisal is required for all HECM transactions, including purchase transactions. The execution of the Amendatory Clause does not negate federal and state mandates to provide a copy of the appraisal to the consumer.