Reverse mortgages have gotten a lot of publicity over the past couple of years both good and bad. A reverse mortgage allows seniors (62 and older) to tap into the equity in their home while eliminating their mortgage payment. In order to qualify for a reverse mortgage senior must be 62 or older and own a home. How much the homeowners can borrower depends on the age of the youngest borrower, the appraised value of the home, where the home is located along with which rate option the homeowners choose. The rate options the borrower may choose from are the fixed rate along several different variable rate options.
In the past the only way to use a reverse mortgage to purchase a home was by using the now extinct Fannie Mae Homekeeper program. The problem was that the Fannie Mae Homekeeper was very limited and thus was retired. In 2008 HUD announced that the HECM (Home Equity Conversion Mortgage) would be eligible for purchase transactions in 2009.

Let's take a look at some of the guidelines of the HECM for purchase program.
General Guidelines:
Any repairs that are required by FHA guidelines must be performed before closing. The seller is responsible for all repair costs.
FHA flipping rules apply. The resales of a property may not occur 90 days or fewer from the last sale. Re-sales that occur between 91 and 180 days where the new sales price exceeds 100% of the previous sales price will require additional documentation validating the property's value.
The borrower must occupy the property within 60 days of closing.
No subordinate financing is allowed.
Property Types:
Existing one-unit properties where the construction has been completed and the property is habitable. This means no Cooperatives, newly constructed residences must have a certificate of occupancy, no boarding houses, or bed and breakfasts. No manufactured homes built before 6/15/1976 and existing manufactured homes built after 6/15/1976 that fail to conform to the Manufactured Home Construction Safety Standards and/or lack a permanent foundation.
Funds to close:
No gift funds, grants, seller contributions, or secondary financing is allowed. The funds to close must be the borrowers own money (cash on hand, money obtained from the sale of assets, or sale of current home.
Okay so now you are probably wondering why would someone use a reverse mortgage to purchase a home. By using a reverse mortgage and couple that may be downsizing may not want to have a mortgage payment which would require them to pay cash or the home. By using a reverse mortgage our senior couple would only need to pay for part of the house in cash thus freeing up some of their money for future needs. Since the reverse mortgage does not require a monthly payment our example seniors have got the best of both worlds.
What's the catch?
Okay as many of my senior clients ask, what is the catch? First off the reverse mortgage is not a cheap loan. The closing costs are typically higher than those for a normal mortgage so this is not a short term fix.
The other downside of a reverse mortgage is that it is a negative amortization loan. What this means is that since no payment is required on a reverse mortgage the balance of the loan increases each month. For many seniors this means their heirs will stand to inherit less from the proceeds of the sale of the home.
I have really just scratched the surface on how a reverse mortgage works but the point is that this loan may very well make sense for some of your senior clients looking to downsize or just move closer to their family. A reverse mortgage is not for everyone and it is more complicated than your normal loan but it is another option to consider when you are working with senior clients.
With many baby boomers becoming seniors every day the reverse mortgage is increasing in popularity every year, why not mention it the next time one of your senior clients is shopping for a home?