In the early 1980’s, a new loan product called a reverse mortgage was approved to be insured by the Federal Housing Administration (FHA). This government-insured home equity loan, more specifically called a Home Equity Conversion Mortgage (HECM), was developed exclusively for seniors and signed into law in 1988. The financial tool became one of the only methods that allowed senior homeowners access to a portion of their equity without having to leave their home or add to their monthly expenses. In 2008, the loan evolved to include a new variation that allowed senior homeowners the same advantages of the traditional HECM reverse mortgage, but added the option of purchasing a new home as well. This loan was called the HECM for Purchase and, with the type of financing it offers, it may be just the answer you are looking for.
How Does It Work?
The HECM for Purchase is a solution that allows you to accomplish two goals in just one transaction: to attain a more fitting principal residence and to obtain a reverse mortgage. This can save you money since you incur only a single set of closing costs because it consolidates two financial transactions—purchasing a home and financing it with a reverse mortgage loan—into one.
With the HECM for Purchase reverse mortgage, the borrower provides a down payment using the sale of the previous home or other savings. The equity earned through the down payment and the new home’s value is then used to calculate the reverse mortgage loan amount. During this process, borrowers may need to meet the loan-to-value ratio requirements with a significant down payment and provide verification of personal income and funds. All or part of the reverse mortgage funds then cover the remaining cost of the home, just like with a traditional mortgage.
The benefit to financing with a reverse mortgage is that instead of paying the loan back every month over time like a traditional mortgage, reverse mortgage repayment is deferred to when the loan matures (See When is a HECM for Purchase Due? below). This way, senior borrowers on a fixed income can finance the purchase of a new home without the burden of having to make monthly mortgage payments. Borrowers are responsible for paying property taxes, homeowner’s insurance, and for home maintenance.
Other Important HECM for Purchase Information
Eligible Property Types
Single family homes and existing properties with four units or less are typically eligible for a HECM for Purchase, and according to the U.S. Department of Housing and Urban Development (HUD), the following properties are not eligible:
- Cooperative units
- Newly constructed residences where a Certificate of Occupancy or its equivalent has not been issued by the appropriate local authority
- Boarding houses
- Bed and breakfast establishments
- Existing manufactured homes built before June 15, 1976; and
- Existing manufactured homes built after June 15, 1976 that fail to conform to the Manufactured Home Construction Safety Standards, as evidenced by affixed certification labels (e.g., data plate and HUD certification label) and/or lack a permanent foundation as required in HUD’s Permanent Foundations for Manufactured Housing Guide or homes that are installed or were occupied previously at another site or location.
Obligations under the HECM for Purchase are the same as the traditional HECM reverse mortgage. You must continue payments for property taxes, homeowner’s insurance, any homeowner’s association fees, and the cost for basic maintenances of the home, in order to avoid defaulting on the loan.
There are some aspects of the HECM for Purchase that differ from the traditional HECM reverse mortgage. Because reverse mortgages are meant to help seniors age in place, you must move into the new home within 60 days after closing, and the new home must become your primary residence.
When is the HECM for Purchase Due?
Although there is no specific date in which the HECM for Purchase loan is due, a few events can cause the loan to become due and payable. The following are such events that would cause loan maturity:
- The last remaining borrower or non-borrowing spouse passes away or leaves the home to live elsewhere for more than 12 consecutive months.
- The home is sold.
- You do not meet the borrower obligations of maintaining payment of property taxes, homeowners insurance, homeowner’s association fees, and basic home repairs or you fail to comply with other loan terms.