Many elderly homeowners want to remain homeowners, but not
in their current house. They may want a house that is
smaller, or without stairs, closer to family or friends, in
a warmer climate, or whatever. If they are over 62, a HECM
reverse mortgage may ease the financial pain of the
There are three ways to acquire a new house while taking out a HECM reverse mortgage. One way is to pay all-cash for the house, then reverse mortgage it. The second way is to buy the new house with a forward mortgage small enough that it can be paid off with the proceeds of the HECM. The third way is to purchase the house and take out the HECM in one transaction under the HECM-For-Purchase program authorized in 2008.These will be considered in turn.
Buy With All-Cash, Then Do a Reverse Mortgage
cash for your new house is the simplest way to go. You can
then take out a HECM to replace some of the assets you
liquidated to purchase the house, or for any other purpose.
Paying all-cash has some adventages over using a HECM to make the purchase. If you want to have the new house constructed to your specifications, for example, you can’t finance construction with a HECM. However, not many seniors have the free cash required to pay all cash, and tapping retirement accounts is resisted, for good reasons.
Buy With a Forward Mortgage, Repay With a Reverse Mortgage
Prior to the HECM for purchase program, the senior who wanted to purchase a house but could not afford to pay all-cash had to take out a forward mortgage to buy the house, then repay it by drawing on a reverse mortgage.
Because the senior had to qualify for the forward mortgage in the same way as any other home purchaser, insufficient income or poor credit could bar the way. Furthermore, the senior who did qualify had to pay settlement costs on both the forward mortgage and the HECM. The new HECM for purchase program eliminates these problems.
Buy With a Reverse Mortgage
In 2008, Congress authorized a HECM for Purchase program, under which seniors can buy a house and take out a HECM reverse mortgage at the same time, incurring only one set of settlement costs. The senior need not be a homeowner but can become one with the aid of the HECM. The program cannot be used to construct a new home, but it can be used to purchase one that is newly constructed and approved for occupancy by the city. The senior must physically occupy the home as their permanent residence within 60 days of purchase.
this program must have the means to pay the difference
between the sale price of the property plus settlement
costs, and the maximum amount they can draw on the HECM. The
maximum draw is based on the lower of the sale price,
appraised value and FHA’s maximum loan amount.
illustration, a senior aged 70 purchasing a $400,000 house
on June 12 could finance about $250, 000 with a standard
HECM. (Older buyers could draw more, younger buyers less).
The remaining $150,000 would have to be financed out of the
senior’s resources: liquidation of assets or withdrawals
from retirement accounts. Gifts from family and friends are
also acceptable funding sources, but gifts from the home
seller or anyone else involved in the purchase transaction,
Borrowers Can Choose the Type of HECM
the HECM for purchase program can select either the standard
or saver version, and either an adjustable rate or a
fixed-rate version – 4 choices in all. The saver version
offers a lower upfront charge in exchange for a smaller
draw, and should appeal only to purchasers who don’t intend
to remain in the home very long. Most purchasers will and
should opt for the standard HECM.
In the current
market, fixed-rate and adjustable-rate HECMs have about the
same maximum draw. If I was taking the maximum draw, I would
select the fixed-rate HECM because when interest rates begin
accelerating, my loan balance would continue to grow at the
fixed rate. If my house appreciated significantly, I could
refinance and draw more cash sometime down the road.
However, if I wanted to use less than half of the maximum draw to purchase the house, retaining the rest as an unused credit line, the adjustable rate HECM might work out better in a rising interest-rate environment . While the amount I borrowed would grow at the rising rate, my unused credit line -- the amount I could have borrowed but didn’t -- would also grow at that rate, expanding my future borrowing power.