Can You Use a Reverse Mortgage
to Buy a New Home?
Reverse mortgages are popular among seniors because they allow homeowners to convert their home equity into monthly income without having to move. Many people use this extra money to remodel their homes or cover living expenses. What some retirees don’t realize is that a reverse mortgage can also help them buy a new home. This option is available through the HECM for Purchase Program.
What Is the HECM for Purchase Program?
The HECM for Purchase Program allows retirees to buy a new primary residence using the proceeds from a reverse mortgage. It combines selling your current home and buying a new one into a single transaction, which can help simplify the process. For those who choose to downsize, this can also reduce overall living costs.
With this type of loan, you do not make monthly mortgage payments. The loan is repaid only when you move out or pass away. It is also a non-recourse loan backed by the FHA, meaning you will never owe more than the value of the home, even if the loan amount ends up higher.
Who Qualifies for an HECM for Purchase Loan?
To qualify, you must be at least 62 years old, and the home you buy must be your primary residence. You must also move into the new home within 60 days of closing.
Eligible properties include single-family homes, two- to four-unit homes, and condos approved by the FHA. Newly constructed homes may also qualify, as long as they are ready for occupancy.
The amount you can borrow depends on factors like the age of the youngest borrower (or non-borrowing spouse), the home’s appraised value, your down payment, and current interest rates. Your income and credit score do not affect eligibility. In general, the older you are, the more you can borrow.
How to Get an HECM for Purchase Loan
When applying, make sure to tell the lender that you plan to use the reverse mortgage to buy a new home. This helps them determine exactly how much you can borrow.
Unlike a standard reverse mortgage, the HECM for Purchase Loan requires a down payment. In many cases, this can be around 50 percent of the home’s purchase price. Down payment funds cannot be borrowed, so you must use savings, gifts, or proceeds from the sale of your current home.
You will also need to complete a counseling session through the Department of Housing and Urban Development. This ensures you understand the terms and responsibilities of the loan.
Costs to Consider
In addition to the down payment, you are responsible for closing costs, property taxes, homeowners insurance, and other fees. Mortgage insurance premiums also apply. The first payment is made upfront and the rest are added over the life of the loan.
Closing costs can sometimes be negotiated, so it’s a good idea to compare lenders. If the total costs outweigh the benefits, a different type of financing may be better.
A HECM for Purchase Loan is generally recommended only if you plan to stay in the home for at least five years. If you fail to keep up with taxes or insurance, the lender can foreclose.
The Takeaway
A HECM for Purchase Loan may be a good option if you want to move or downsize in retirement. Before deciding, make sure it aligns with your financial goals and long-term plans.
