One program that makes relocating with a reverse mortgage possible is the Home Equity Conversion Mortgage for Purchase (HECM for Purchase), also known as a reverse mortgage for purchase or H4P.
The HECM for Purchase program enables borrowers to use a reverse mortgage loan to finance a portion of their new home purchase. But how does it work?
What is a Reverse Mortgage?
Let’s start with the basics of a reverse mortgage. The most common type of reverse mortgage is the home equity conversion mortgage (HECM), which is insured by the Federal Housing Administration (FHA) and regulated by the U.S. Department of Housing and Urban Development (HUD).
A HECM reverse mortgage works by converting a portion of the home’s equity into cash. The borrowers receive money from the equity they’ve built up in their homes.
To qualify for a reverse mortgage loan, homeowners must be 62 years of age or older and have significant equity in the home. Additionally, the home must be the primary residence of the homeowners, meaning they live in the home for most of the year. Vacation homes, secondary homes, and investment properties cannot be used for a reverse mortgage.
Qualifying properties include single-family homes, two-to-four-unit properties in which the homeowners occupy one of the units, condominiums, townhouses, and some manufactured homes.
The first thing a HECM loan will do is pay off your current mortgage, if you still have one. For the remaining loan proceeds, homeowners can choose to receive their funds as a lump sum, fixed monthly payments, a line of credit, or any combination of the three.
The amount of money homeowners can receive is based on the home’s value, the age of the youngest borrower, and the current interest rates. Reverse mortgages come with both fixed rate and adjustable-rate options.
One of the perks of a reverse mortgage is that it does not require monthly payments to pay it back. This makes it appealing to those in retirement who are looking for a way to supplement their income or save for unplanned expenses. There are no rules about how the money may be used, giving borrowers a lot of options.
A reverse mortgage is paid back when the home is sold, it is no longer the primary residence of the borrower, or when the last borrower or qualified non-borrower passes away, in which case the home is typically sold.
What is a HECM for Purchase?
A HECM for Purchase is a financing option that allows home buyers to use a reverse mortgage to pay for up to half of the total sale price of a new home. This means that homeowners can complete both a reverse mortgage and a new home purchase with a single transaction and one set of closing costs.
Similar to a traditional reverse mortgage, borrowers are not required to make monthly mortgage payments on the portion financed by the reverse mortgage as long as they live in the home. However, they must still meet the reverse mortgage loan obligations, which include paying property taxes, homeowners’ insurance, maintenance costs, and any required fees such as HOA fees.
There are no prepayment penalties, so borrowers are allowed to pay down the loan ahead of time or make interest payments if they wish.
The loan balance will become due when the home is sold, vacated for more than a year, or when the last remaining borrower passes away. If the borrower remains in the home until passing away, their children will have the option to sell the home and keep any proceeds or keep the home and pay off the loan.
It’s important to note that the HECM for Purchase is a non-recourse loan, meaning that neither the borrower nor their heirs will ever owe more than the home is worth.
The HECM for Purchase program was created by the U.S. Department of Housing and Urban Development (HUD) in 2009 to simplify the process of purchasing a new home with a reverse mortgage.
Before this program was implemented, borrowers would have to apply for two mortgages and pay closing costs twice, which was a hassle and expensive.
How Does a HECM for Purchase Work?
When buying a home, you usually have two options: pay cash or make a down payment and finance the rest with a traditional mortgage. With a HECM for Purchase, you have a third option.
HECM for Purchase borrowers typically make a large down payment, around 50%, and finance the remaining balance through a reverse mortgage. This allows you to use the money you would have used to buy the house to do other things while still owning the home. And for the amount that is financed with the reverse mortgage, no monthly mortgage payments are required.
With a traditional reverse mortgage, you receive cash in the form of a lump sum, line of credit, and/or monthly payments. However, with a HECM for Purchase, you can use that money to purchase a new principal residence while the remaining reverse mortgage proceeds goes to the borrower.
If you plan to get a HECM for Purchase, you will need to connect with a lender who specializes in these loans. It is also recommended that you contact a real estate agent who works with the HECM for Purchase product. Your HECM loan officer may be able to help connect you with one.
The HECM for Purchase Process
Before moving forward with a HECM for Purchase, you will need to sell your current home so you can use the proceeds for the down payment on your new purchase.
During this time, you will also start to shop for the new home you wish to purchase. Your loan officer will help you understand how much you can afford. Once you find the right home, you will purchase it with the proceeds from the sale of your previous home.
Depending on your age, interest rates, and other factors, you will need to put down 50% to 60% of the purchase price. The remaining balance will be financed by the reverse mortgage.
The HECM for Purchase process is not fast and can take six months or longer from start to finish.
It’s also important to note that all borrowers must complete a counseling session with a third-party counselor approved by HUD before filing a reverse mortgage loan application. Your HECM for Purchase loan officer will help connect you with qualified counselors.
HECM for Purchase Example
For illustrative purposes, let’s consider a fictional scenario with a couple from Illinois who have decided to move to Florida. Their reasons for relocating are to enjoy warmer weather and to be closer to their children.
If they opt to use a HECM for Purchase program, they will have various options available to them, regardless of whether they choose to downsize or upsize.
|Downside vs. Upsize?||Downsize||Upsize|
|Cash after sale of home||$500,000||$500,000|
|Purchase price of new home||$400,000||$700,000|
|Down payment required to purchase new home||$236,000||$405,500|
|Amount financed by Reverse Mortgage||$164,000||$294,500|
Please note that the specific figures may differ based on various factors such as the purchase price of the home, the age of the borrowers, interest rates, and other relevant considerations.
Who is a HECM for Purchase for?
A HECM for Purchase may be a good option for those who are planning to relocate, downsize, or upsize in retirement. This option has several advantages over paying for the entire home purchase with cash.
First, it allows retirees to keep more of their nest egg, which is important as they head into retirement. Second, it makes it easier to qualify for a nicer home than you might without it. Third, it reduces monthly costs since you will no longer have a monthly mortgage payment. Last, it’s an excellent option for those who want to move into a new home and remain there as they age.
While most retirees tend to retire in place, there are several reasons why retirees may want to move, including the following:
- Their current home may be more house than what they need, and they want to downsize.
- Their current home may be too expensive to maintain, or they want to live in a retirement community.
- They may want to move closer to their family
- Their neighborhood may not be as safe as it was when they first bought it years ago, and they want to move to a safer community.
- They may want to move to a warmer climate
- They may want to upsize. According to a study by Merrill Lynch and Age Wage, 49% of retirees don’t downsize, and 30% purchase larger homes when they buy a new home in retirement.
Conclusion: Is a HECM for Purchase Right for You?
A HECM for Purchase is a good option for those looking to relocate, downsize, or upsize in retirement. It allows homeowners to finance part of their new home purchase with a reverse mortgage loan and eliminates the need for monthly mortgage payments.
The HECM for Purchase program offers several advantages over traditional financing options, including reduced monthly costs, the ability to keep more of the nest egg, increasing monthly cash flow, and the opportunity to qualify for a nicer home than they might without it, or the opportunity move into a home that’s a better fit for them.
If you are interested in pursuing a HECM for Purchase, connect with one of our HECM for Purchase specialists and start exploring your options today.
Reverse mortgage borrower must occupy home as primary residence and remain current on property taxes, homeowner’s insurance, the costs of home maintenance, and any HOA fees.
This information is intended to be general and educational in nature and should not be construed as financial advice. Consult your financial advisor before implementing financial strategies for your retirement.