Reverse Mortgage to Purchase a Home: HECM for Purchase
Many seniors who investigate the options available to them for downsizing find that they have some hard decisions to make. They may have a substantial amount of equity in their current home and must then decide whether they should take out a loan and prepare to pay mortgage payments on their reduced retirement income or whether they should pay cash and tie up their liquidity.
HECM for Purchase
The FHA offers a solution to this quandary which can work well in certain circumstances. The HECM for Purchase is a reverse mortgage that allows you to purchase a home with the proceeds of your home sale through a reverse mortgage. This process gives you liquid income, together with your new home purchase, all in one transaction. Reverse mortgages allow the borrower to remain in the current home while also offering a good financial tool for retirement planning.
When you take out a HECM for Purchase, you sell your existing home and buy another home, all through the Reverse Mortgage procedure. You won’t have any principal or interest payment obligations. You then mortgage your new home to the lending institution but you retain the right to continue to live in that new home until you die or leave the home. No down payment will be required on your new home and your obligatory payments are limited to the Reverse Mortgage’s third-party costs, closing costs, home maintenance, home insurance, property taxes and loan insurance costs.
If there is equity left after you purchase your new home the lending institution will facilitate a line or credit or monthly payments to you. After you close the HECM loan the interest on the outstanding balance will accrue monthly, meaning that the loan balance grows over the years.
When you die, sell or move to a new home, or if you can no longer live in the home for a 12-month period (if, for instance, you move in with a child or move to a long-term care facility) the loan becomes due. Then there are different options available for you or your heirs.
If you are still alive or your heirs don’t have any interest in keeping the home, the lender will sell it and the loan and accrued balance are paid off. You and your heirs will never owe any money on the loan — if the proceeds aren’t enough to cover the cost of the sale and the accrued interest, FHA will pay off the difference from its insurance fund. This is a no recourse loan so, in such a case, there are no penalties levied against the borrower or his estate. If one spouse dies and the second partner is still living in the house, that second partner may continue to live in the home, provided that they had been listed on the original loan. Current court cases have left open the question of what will happen to non-borrowing spouses in the event that they were not on the loan from the outset.
If both spouses are deceased, their heirs have first rights to purchase the new home at 95% of the appraised value.
Prepare for the New HEMC Rules
As with a Standard HECM loan, HECM for purchase borrowers must demonstrate the ability and resources to meet HECM obligations (property tax payments, MIP insurance payments, home maintenance payments, home insurance payments). A standard formula, used by the lender, assesses the potential borrower’s readiness and willingness to pay loan costs. The lender checks the borrower’s liquid assets, income and past credit history. Seniors with a higher income require fewer liquid assets to qualify for the loan, those with more liquid assets require less income, etc.
If a potential borrower shows a chronic history of late payments, at a time that he had the ability to pay, his request for a HECM loan would undergo more scrutiny. If, however, his credit rating was impacted by a medical emergency or some other such sudden occurrence, the assessors will take that into consideration when deciding on his loan request.