For those who are looking to move into a new home and age in place, the HECM for purchase can be a valuable solution.
What is a reverse mortgage purchase
The Home Equity Conversion Mortgage (HECM) for Purchase is a popular financial option for individuals looking to purchase a new home.
This type of reverse mortgage allows borrowers to buy a new home in a single transaction without having to make monthly mortgage payments.
To apply for and qualify for a HECM for Purchase, borrowers must meet the same eligibility requirements as any HECM loan. They must be 62 years or older and own their current home outright or have significant equity in it.
Once approved for the loan, borrowers must adhere to specific requirements, such as maintaining the new home to FHA standards, paying property taxes, and keeping up with homeowners insurance. The HECM for Purchase program is run by the Department of Housing and Urban Development (HUD).
It's worth noting that the down payment for a new home purchase with a reverse mortgage is usually more significant than that of a typical single-family home.
However, this type of mortgage is particularly useful for those looking to downsize from their current home, relocate closer to family, or move into a single-story home that is better suited for aging in place.
Allowable property types for the HECM for Purchase program include single-family homes, 2- to 4-unit properties, HUD-approved condos, and planned unit developments. For new construction, a certificate of occupancy must be in place before the HECM for Purchase transaction can occur.
In summary, the HECM for Purchase program is an attractive option for individuals seeking to buy a new home without making monthly mortgage payments.
By following the same process as applying for any HECM loan, borrowers can enjoy the benefits of homeownership while aging in place.
Eligible property types
Reverse mortgages are available for several property types, including single-family homes, planned unit developments (PUD), 2-4 unit dwellings, and HUD-approved condominiums. However, there are some restrictions to keep in mind.
For a property to qualify for a reverse mortgage, it must be in a habitable condition and not under construction.
Unfortunately, co-ops, boarding houses, and bed and breakfasts are not eligible for this type of mortgage. Additionally, newly constructed homes that lack a Certificate of Occupancy cannot be considered.
When it comes to manufactured homes, those built before 1976 or those that do not meet the Department of Housing and Urban Development standards cannot be used for a reverse purchase mortgage.
Overall, it's important to note that while reverse mortgages are available for a variety of property types, there are specific eligibility requirements that must be met.
By understanding these requirements, borrowers can make informed decisions and choose the best mortgage option for their needs.
Down payment requirements
When using the reverse mortgage for purchase program, borrowers are responsible for covering the down payment on their new home purchase, which can often be significantly more than a typical single-family home.
In most cases, the equity from the sale of their old home can be used to cover the down payment. However, in other cases, borrowers may need to use their savings or find other means to cover the cost.
If the value of their old home is less than the required down payment for their new home, borrowers will need to provide the difference in cash.
However, some gifts and other sources may be allowed under FHA requirements, including family gifts from those who are not involved in the transaction.
The down payment requirement is based on several factors, including the age of the youngest borrower, current interest rates, and the price of the new home or the HECM lending limit of $1,089,300. Typically, the down payment for a HECM for Purchase is between 45-70% of the purchase price.
Today's reverse mortgage purchase rates
||6.885% (2.125 Margin)
||11.385% (6.625 Margin)
These reverse mortgage purchase rates are provided for informational purposes only and are subject to change without notice.
The actual interest rates and fees available to you may vary based on your individual circumstances, credit history, and other factors.
It's important to consult with a licensed reverse mortgage professional to get personalized information about your specific situation and the costs associated with a reverse mortgage purchase.
Allowable down payment sources
When it comes to meeting the down payment requirement for a reverse mortgage, borrowers have several allowable sources, including cash on hand from savings, 401k or other accounts, proceeds from the sale of the previous home, and even a gift from family.
While the most common funding sources are savings and sale proceeds, there are other acceptable options under the Federal Housing Administration, the loan's insurer.
For financing the equity portion of the loan, borrowers can use funds from an earnest money deposit or a withdrawal from a savings or checking account, retirement fund, or other acceptable funding sources.
Some forms of gift money are also acceptable, including those from family members, employers, charities, government organizations focused on home ownership initiatives, or close friends with a documented interest in the borrower.
However, gifts from anyone involved in the transaction are not allowed.
In addition to these funding sources, there are other less common ways to meet the down payment requirement, including collateralized loans, savings bonds, employer assistance programs, and other means.
With so many options available, borrowers can find a way to finance their reverse mortgage that works best for their unique situation.
The benefits of a reverse mortgage for purchase
Here are some of the key benefits to consider when deciding whether a reverse mortgage is right for you:
Non-Recourse Feature - The HECM for Purchase, like all HECM loans, has a non-recourse feature. This means that when the loan becomes due, the borrower does not have to repay more than the home is worth at the time of sale. This provides protection to the borrower and their heirs.
Single Transaction - The HECM for Purchase allows borrowers to purchase a new home with a reverse mortgage, all in a single transaction. This simplifies the home buying process and eliminates the need for multiple transactions.
No Monthly Mortgage Payments - With the HECM for Purchase, borrowers can eliminate their monthly mortgage payments while they enjoy their new home. This can provide financial relief to retirees and allow them to live more comfortably in retirement.
Flexibility - Reverse mortgages offer borrowers flexibility in how they receive their funds, whether through a line of credit, lump sum payment, monthly payments, or a combination of these options. This allows borrowers to customize their loan to meet their unique financial needs.
- Ownership - Borrowers retain ownership of their home and can continue to live in it as long as they meet the loan requirements, including paying property taxes and maintaining the property. This provides peace of mind and security to borrowers and their families.
The downsides of a reverse mortgage for purchase
It's important to weigh the potential downsides before deciding whether a reverse mortgage is right for you. Here are a few things to consider:
When a borrower passes away, their heirs may inherit a smaller amount of equity in the home, as the home may need to be sold to pay off the loan balance. This can impact the inheritance that the borrower may have intended to leave to their loved ones.
Upfront and ongoing insurance premiums are required to maintain the loan, and standard closing costs can also be expensive. These costs can add up over time, and should be factored into your decision.
- A reverse mortgage is not suitable for everyone. For example, if you plan to move out of the home in the near future, a reverse mortgage may not be the best option for you. It's important to consult with trusted advisors, such as a financial planner or attorney, to discuss the potential drawbacks and compare the options available.
How is a reverse mortgage purchase different from a traditional mortgage?
When it comes to purchasing a home, a reverse mortgage operates differently than a traditional mortgage.
One major difference is the larger down payment required for a reverse mortgage purchase, as there are no monthly mortgage payments to be made. It's important to note that a reverse mortgage purchase follows FHA guidelines, which come with additional regulations.
For example, there are restrictions on the fees that can be paid by the seller and concessions from the seller.
Additionally, the property must meet certain requirements to be eligible for a reverse mortgage purchase. It's essential to understand these differences before deciding if a reverse mortgage purchase is the right choice for your situation.
What type of home is not eligible for a reverse mortgage purchase?
If you are considering a reverse mortgage purchase, it's important to know that not all types of homes are eligible for this type of loan.
The reverse mortgage program is designed to provide older homeowners with a way to access the equity in their primary residence without having to sell their home.
Therefore, vacation homes, secondary homes, and investment properties are not eligible for a reverse mortgage purchase.
Another important factor to consider is that homes on income-producing land, such as farms, also do not qualify for a reverse mortgage purchase.
This is because the Federal Housing Administration (FHA) regulates the reverse mortgage program and the loan must be secured by a primary residence.
Furthermore, the reverse mortgage loan must be the primary lien on your home to qualify.
This means that if you have an existing mortgage on your primary residence, you may still be able to obtain a reverse mortgage purchase loan, but you will need to use the proceeds from the loan to pay off your existing mortgage before accessing any remaining funds.
Are reverse mortgage proceeds taxable?
One of the advantages of reverse mortgages is that the loan proceeds are not taxable. The IRS treats the funds you receive as a loan advance, rather than income.
Therefore, the money you receive from a reverse mortgage is not taxable, and you won't have to report it as income on your tax return.
This means that you can use the funds you receive from a reverse mortgage for any purpose you wish, without worrying about taxes.
Whether you choose to use the funds to pay off existing debts, cover medical expenses, or simply enjoy your retirement, the money is yours to do with as you please.
Understanding the details of a reverse mortgage purchase can help you determine if this type of loan is right for you. It is important to remember that there are lots of factors that go into the eligibility, down payment requirements and the rate you can get on your reverse mortgage.
From the type of home you own, to your current financial situation and even your anticipated income, a lender may have specific stipulations that help it decide who qualifies for such a loan.
If contextualized with your personal circumstances, a reverse mortgage purchase may be just what you need for maintaining or increasing your net worth and quality of life.
Make sure you reach out to MakeFloridaYourHome today to explore further and gather more useful insights about this special type of loan before making a final decision.