Purchase Reverse Mortgage for Buyers: More Info
Reverse mortgages are available for senior homeowners above the age of 62, to cash in on their home equities, while continuing to live in their same homes. The government is currently considering backing a program to help older homeowners purchase a home with this same program.
The HERA (Housing and Economic Recovery Act of 2008) approved the HECM-for-purchase program allowing lenders to close mortgages after Jan. 1, 2009. HECM stands for Home Equity Conversion Mortgage, which is the federal term for a reverse mortgage.
This new reverse mortgage purchase option allows older house owners to make a down payment on a new home and then utilize the reverse mortgage as financing. The same law reduced the maximum loan fee on reverse mortgages to 2% on the first $200,000 home value and 1% of the balance thereafter, with a cap of $6,000.
A reverse mortgage enables senior homeowners to convert part of the home equities into tax-free income without needing to sell the home, give up title, or take on a new mortgage payment obligation.
For example, if a 70-year old senior wanted to purchase a $300,000 home, he or she could put approx $124,000 down and finance the balance plus closing costs, using a reverse mortgage. Monthly repayments are not needed for as long as he or she lives in the same home.
Eligible properties for this HECM for purchase program include:
- Condos
- Manufactured homes built after June 15, 1976 (meeting HUD’s guidelines)
- 1-to 4- unit single-family homes.
Seniors interested in the HECM for purchase program need to enroll in a HUD counseling class. They may not obtain a bridge loan or gap financing to borrow against other assets for the down payment or closing costs. Lenders are required to verify the source of all the funds prior to closing. To avoid cases of property flipping, lenders need to take steps to ensure that a) only current owners may sell properties that will be financed using FHA-insured mortgages; b) resale of a property may not occur 90 or fewer days from the last sale; and c) FHA requires additional documentation validating the property’s value for resale that occurs between 91 and 180 days when the new sale price exceeds 100% of the previous sales price.
More than 450,000 HECMs have been made since 1989, the year FHA launched the reverse mortgage pilot program. FHA insured nearly 112,000 HECMs in fiscal 2008, up from 107,367 HECMs in 2007.
