Example of a Purchase Scenario using a Reverse Mortgage

In this post - An example of a way the HECM For Purchase could be used.  I always find that if I can place new learning into an example, then the learning has a better chance of sticking.

 

First thing to know is that the Reverse Mortgage for Purchase (or HECM For Purchase) is not your typical 80/20 loan.  The required down payments will be much larger than 20%.  I know that's not the best news, but keep reading.  This loan requires no minimum credit score or debt to income!  So if you have a senior homebuyer who just sold their big ole family house that they bought for $32,000 30 years ago for $350,000 they just might have a sizeable down payment!   

 

Here's one example:

 

Mr. & Mrs. Barry Buyer (fake name), just sold their rambling family home (hopefully you were the listing Realtor!) and they netted after all costs $150,000.00.  Now they want to buy a 3 bedroom 2 bath single story home somewhere in Temecula or Murrieta.  Their income is about $3000.00 per month between the two of them.  What are you going to show them?  Anything over $150,000 will either cause them to tap into savings or require a loan of some kind.  Any loan is going to require monthly payments and probably for 30 years.  Maybe they'd be better off renting - or maybe a reverse mortgage would work.  Here's how.

 

You show them a beautiful 3 bedroom home in Murrieta listed at $280,000. It's fairly new, in a great neighborhood and single story of course!  Newer is important because they are planning that this is the home they will live in until they "graduate" so ease of maintenance is a key buying point.  In this example our buyers are able to purchase a higher value home and STILL never have to make a home payment.

 

Here's what happens: 

Home Price                              $280,000

Closing Costs                           $  12,808  (including title, escrow, MIP, loan fees.)

Funds Needed to Close            $292,808

 

Where the money is coming from?

New HECM Loan                    $161,122

Cash From Buyer                     $131,686 (leaving them some change)

$ From Lender and Buyer         $292,808

 

So - Depending upon your clients dreams of retirement life they may find that a reverse mortgage is an appropriate vehicle for purchasing their "rest of life" home.

 

Some cautionary words - because the loan never requires a monthly payment, each month the loan balance goes up impacting the homeowner's equity.  In essence the remaining equity is where the payments come from.  If the home does not appreciate much and our homeowners live long enough there could come a day when they have zero equity or are upside down.  Then what?  Well, as long as the homeowner is living in the home and paying the property taxes, keeping the home insured and in good maintenance there would not be a default.  So the homeowner can still remain in the home with no payments. 

 

So what happens when they die?  Well, it depends upon what the heirs want to do?  If there is equity - sell the house and keep the change, refinance the balance, or pay it off.  Exactly the same as they would if a forward mortgage was encumbering the home.   If there is no equity left, then they have two choices - one, pay the balance due and keep the property or two, sell the home for fair market value and the lender will get the balance of what's left by filing a claim on the MIP Insurance on the loan.

 

These are very simple explanations - for a more detailed explanation please read the HUD guidelines at. http://www.hud.gov/offices/hsg/sfh/hecm/hecmabou.cfm

Which in part say the following: "The HECM insurance guarantees that you will receive expected loan advances and that you will not have to repay the loan for as long as you live in your home. The insurance also guarantees that, if you or your heirs sell your home to repay the loan, your total debt can never be greater than the value of your home."  BUT-if you sell it must be an arms length transaction, meaning if the balance due is greater than the present value; you cannot sell it to a relative for market value to excuse the remaining balance.  It's just like any other FHA insured loan in that respect.

 

Ok - this post is way too long already... I'll finish up now and post another sample scenario tomorrow!   I'm heading out to help a client who already has a reverse mortgage, take advantage of the new higher limits (lucky people live close to the beach and their little bungalow is worth a heap of money even in this market) they can access another $100K and still have tons of equity and no monthly payments.  They have no children to leave the equity too ... "Someone's going to spend our equity -may as well be us!