If you or your spouse are 62 or older, you can use a Home Equity Conversion Mortgage (HECM) to purchase a home as long as it is your primary residence.
What Is A Reverse Mortgage?
The FHA insured reverse mortgage program is called a Home Equity Conversion Mortgage, (HECM). This is by far the most common reverse mortgage program available. A reverse mortgage is a loan that is specifically designed for people age 62 and older which allows you to convert a portion of the value of your primary residence into cash that you never have to repay as long as you or your spouse live in the home.
While you never have to make a mortgage payment, the house stays in your name so you do have to keep current on the property taxes and homeowners insurance premiums as well as maintain the home – basically, everything you’d do if you owned it free and clear.
Keep in mind that the reverse mortgage is still a loan and eventually needs to be repaid. However, you do not repay it on a monthly basis from your budget. The loan only comes due when neither you or your spouse are able to live in it as your primary residence. Because you are not making any payments, the interest and mortgage insurance that you would pay on a normal FHA loan every month is added loan balance. This is the reason the amount owed on the reverse mortgage increases.
What Can I Do With A Reverse Mortgage?
Reverse mortgages are designed to help older homeowners by allowing them to access additional funds from the equity in their home without worrying about how to pay it back. These funds can be used for health care cost, living expenses, to upgrade your standard of living, to help family with college education, or any other reason you need funds. There is really no limit on the what you can use the money for. More recently, it has become a financial planning tool with the “stand-by line of credit” and “reverse mortgage for purchase” programs.
There are multiple ways to receive the funds from a reverse mortgage:
- 1.You can set up a monthly payment (where the bank pays you)
- 2.You can use it as a line of credit
- 3.You can take it as a lump sum (some restrictions apply)
- 4.Or any combination of the above
How Much Money Can I Get From A Reverse Mortgage?
Generally speaking, the older you are and the more equity you have in your home, the more money that you can receive from a reverse mortgage. In 2015 HUD set some restrictions on the amount of money that you can receive during the first 12 months of the loan, but there are no restrictions after that.
How Does The Reverse Mortgage For Purchase Program Work?
In 2009 HUD began allowing people who are 62 and over to use a reverse mortgage to purchase a new primary residence. The reverse mortgage loan is placed against the home you are purchasing, just like a regular mortgage would be, and then you would bring the remaining funds to the closing in the form a down payment.
The reverse mortgage for purchase program allows you to right-size to a new primary residence that fits your lifestyle. It may be closer to family, or downsizing to a ranch style home or any other number of reasons. Typically, it is to a home that will improve your standard of living and a place that you want to stay for the foreseeable future.
The reverse mortgage will not pay for 100% of the purchase price. You can usually finance between 50-70% of the value of the home with the reverse mortgage for purchase program. The home will be in your name so you will have to make sure to budget for your property taxes and homeowners insurance as well as any HOA dues and maintenance. But as long as you live there, you will never have to make a mortgage payment.
To summarize, not only can you get a home that’s more suited to your lifestyle or closer to family and loved ones, you can get it without depleting your savings or retirement accounts and without having to make a mortgage payment out of your fixed monthly income.
Who Can Qualify For A HECM Reverse Mortgage For Purchase?
You or your spouse must be at least 62 years old in order to qualify for a HECM reverse mortgage and the new home must be your primary residence. Since
you will be making a large down payment on the new home, typically 30% - 50%, it helps if you have substantial equity in the home you are selling or
own it outright. The new home you are purchasing with the reverse mortgage must meet FHA standards and you cannot have and delinquent federal debt.
Finally, you will need to qualify with enough income so the lender is sure that you can afford to pay for your property taxes, homeowners insurance
What Kind Of Homes Are Eligible?
The following homes are eligible under the HECM reverse mortgage for purchase program:
- Single Family Homes
- 2-4 unit Homes *
- Manufactured Homes **
- FHA approved Condominiums
New construction homes are eligible but must be 100% completed with a certificate of occupancy issued before you can begin an application for a reverse mortgage.
*2-4 unit homes are eligible but one unit must be owner occupied and most lenders require a history of property management by the buyers.
**Manufactured homes are eligible but must be on land that you own and be 1976 or newer model with a permanent foundation. Other requirements also exist.
Are There Disadvantages Of HECM Reverse Mortgages?
It is best to talk with a reverse mortgage specialist to get the pros and cons and see if a reverse mortgage is right for your specific situation. One reason that a reverse mortgage is not right for some people is because of the loss of future equity. You can sell your home at any time when you have a reverse mortgage, but you will not have as much equity in your home as you would with a regular mortgage. However, you also might enjoy your time in the home more since you won’t be making a mortgage payment.
If you pass away while living in the home, your heirs will inherit the home as well as any equity that is available. They have up to 12 months to either sell or refinance the home to pay off the reverse mortgage. If there is no equity in the home, the heirs can simply give the home to the bank and walk away with absolutely no recourse.
If you think it might be time to right-size your home and life with a reverse mortgage for purchase, you should schedule a consultation with a reverse mortgage specialist in Colorado to get details and find out if this dynamic financing option is right for you.