“Earn equity from the home you own and still retain ownership.”
In 1988 President Reagan signed the Housing and Community Development Act that allowed HUD to insure Home Equity Conversion Mortgages. A pilot program was started in 1989 with 50 lenders. However, it wasn’t until January 1, 2009 that the program was enhanced to allow borrowers to Purchase a new or existing home using HECM funds.
The reverse mortgage for purchase program can have a number of different names including, but not limited to the following: HECM for Purchase, H4P, RM4P. Regardless of what you call it, it can help you to be able to afford to move into a home that best fits your need and never have to make a mortgage payment as long as you live there. Since it is still your home, you do have to make sure to stay current on all property taxes, homeowner’s insurance, maintenance and HOA fees or any other housing related costs. Click here to learn more about the facts of reverse mortgages.
The HECM for Purchase program was designed to allow people age 62 and over to purchase a new principal residence and obtain a reverse mortgage within a single transaction. The program was also designed to enable senior homeowners to relocate to other geographical areas to be closer to family members or downsize to homes that meet their physical needs, i.e., handrails, one level properties, ramps, wider doorways, etc.
I’ll explain how it works with a couple of different scenarios.
You have decided to sell your home. The reasons for this are limitless, the yard is too big, the stairs are becoming difficult, you want to be closer to kids and grandkids, whatever the reason, you’ve decided to move. The problem is that you either don’t want a new mortgage or cannot qualify for one now since you are retired and don’t have enough income.
You talk to a real estate agent and find out that you can sell your home for $195,000 and after paying off a small equity loan and pay for the closing costs, you cash out with $152,000. This creates a problem because you can’t find a new home as nice as the one you are leaving for this price.
However, you do find a perfect patio home for $275,000. You could take $75,000 out of your IRA and add it to the proceeds from the sale of your old home and have enough to pay cash for the new home, but then you might have to pay extra taxes for pulling so much money out in one year. Or if the market is down, you then have to take money out at a depreciated value to cover the shortfall leaving you even less money in the future to live on. Neither of these options is very appealing.
However, by using the reverse mortgage for purchase program, you can finance approximately $146,000 of the $275,000 purchase price after closing costs meaning that you would only have to pay a down payment of $129,000. This would leave you with $23,000 left over.
Here is what it would look like:
|Net cash out from her old home||$152,000|
|Purchase price of new home||$275,000|
|New reverse mortgage loan||-$146,000|
|Cash required for down payment||$129,000|
|Money left in her pocket||$23,000 ($152,000 – $129,000)|
In a nutshell, with a reverse mortgage you can get the home that you want and bring less money for the down payment. Now please be aware that not every situation turns out this perfect. It depends on how much money you have for the down payment, your ages, the purchase price of the new home that you are buying, as well as the interest rates and loan programs that are available at the time.
From 2009 to about 2015, there were a number of changes to the reverse mortgage program so things can change, and if they do, the scenario above might not be applicable. However, since 2015, things in the reverse mortgage world seem to have settled down so let’s keep our fingers crossed that there are no more changes.
You are selling your home in an expensive market, say Denver, and moving to a less expensive market, say Greeley, Pueblo, or a small mountain town. You own your home free and clear or have a sizable amount of equity and can pay cash for the new home.
Using the same numbers from above, you find a great home for $275,000. You can pay cash for it from the money that you received from the sale of your old home. My question to you would be “why”?
Why tie up an extra $146,000, (the amount of the new reverse mortgage loan), in an asset that you can’t get back without either selling your home or obligating yourself to a monthly payment (as with an equity loan). Depending on the amount of other assets that you have, the money you save by getting a reverse mortgage instead of paying cash for the new home could go a long way to helping you live a more comfortable lifestyle.
Here’s the bottom line – A reverse mortgage for purchase can allow you to get the home that you want while bring less money to the closing for the down payment. If you are thinking of buying a new home and you are age 62 or above, please call me and I can go over the details of the program and create a custom quote for your specific situation. Thanks for taking the time to read this.