Ins and outs of the new Reverse Mortgage Purchase Program
It will be nice if we can buy a new home without having to make monthly mortgage payments on the new home. That is no longer a dream, and it is now something achievable for most American senior citizens. They can now purchase a new home while using a revere mortgage to finance the purchase.
A new change in the federal housing law allows seniors to purchase new homes using a reverse mortgage. The eligibility criteria for obtaining a reverse mortgage still apply. The senior has to be able to make a substantial down payment on the new home, and can use reverse mortgage to finance the balance amount. This way, the senior can live mortgage-free for the rest of his/her life.
Already, reverse mortgages as a financing option have been very popular for several years now. They allow the senior home owner to use the home equity in the form of a loan, without needing to sell the property or home. With the passage of the HERA (Housing and Economic Recovery Act) of 2008, seniors can use the HECM (Home Equity Conversion Mortgage, fancy name for reverse mortgage), to finance the purchase of a new property, with effect from January 1, 2009.
The new reverse mortgage for purchase program works like a traditional HECM or reverse mortgage financing option. But it is different in that seniors can tap the equity in the new home to avoid making mortgage repayments instead of opting to get monthly incomes through the reverse mortgage.
In these troubling economic times, seniors trying to get financing for a new home purchase are finding it very difficult to get it done. This HECM for purchase option serves as an attractive alternative to the traditional options for financing for a senior purchasing a new home.
The process involved in using a reverse mortgage to buy a house is quite straightforward. Instead of making the mortgage repayments, the borrower will grant the lender a gradually increasing share of the amount of the down payment. It is different from traditional reverse mortgage in that you are now starting out in the new home with a portion of the value of the new home, rather than 100% of the home value.
For example, let’s take a home-owning senior couple in Wyoming who want to sell their home and move to Florida. Their existing Wyoming home is valued at $250,000 but the condo they want to get in Florida costs $450,000. Previously they had to sell their Wyoming home and get a new mortgage for the balance $150,000. Seniors with a limited income potential may find it difficult to qualify for new mortgages like this.
By using the reverse mortgage for purchase program, the same couple will be able to put up say $200,000 from the sale of the Wyoming property as down payment, cover the rest with a reverse mortgage for $250,000, pocket the remaining $50,000 from the original home sale, and be able to live mortgage-free the rest of their lives. The reverse mortgage lender gradually gains an increasing stake in the $200,000 down payment, and that amount is to be repaid when the home is eventually sold and vacated.
The couple would still own the new home as a matter of course. They can still profit from any increase in the value of the new home, when it is vacated and sold. The reverse mortgage lender would be paying a small premium to the FHA (Federal Housing Authority) as insurance against any decline in the value of the new home.
The program allows for the normal eligibility conditions for reverse mortgages, like seniors should be aged 62 or above. The amount that is available through reverse mortgage is calculated based on the age of the senior and the purchase price of the home - the higher the age of the borrower, the larger is the amount of reverse mortgage eligibility.
The new reverse mortgage for purchase program is available in most states, but there are some obstacles remaining in states like Massachusetts and Texas. Some lenders may not be offering this program as of yet because they are being cautious and are awaiting further guidance from the HUD before proceeding.
The decline in the housing prices in this troubled economy may reduce the amount of down payment seniors are able to fund through the sale of an existing property. This is especially so in states like California and Florida, where the fall in house prices have been very severe.
For further information about the HECM for purchase program, seniors are advised to contact a certified HECM counselor.
