The New Real Estate Boom(ers): Purchasing with Reverse Mortgages

In October of 2008, HUD rolled out their reverse mortgage product and in March of 2009, they perfected it.  With rates expected to rise and the tax credit setto expire, many real estate professionals are looking for new and under-served markets to reach out to.  Since HUD has perfected their reverse mortgage, the Home Equity Conversion Mortgage (HECM) and the market for US residents 62 or older is expected to nearly double between now and 2050, perhaps now is their time.

A reverse mortgage is a loan where home equity is converted into a lump sum payment or series of payments to the homeowner or a combination of the two.  There no requirement for payment until all borrowers no longer live in the home but the borrower must keep the home in good repair, taxes current, insurance current and (if applicable) association dues current while they do.  The benefits of purchasing with a reverse mortgage are as follows:

• seniors can preserve their savings
• seniors who can't qualify for a forward mortgage due to income or credit often can qualify for a reverse mortgage
• seniors can own their home for as long as they are alive, keep taxes current, keep insurance current and live in the home as their primary residence without needing to make a payment
• seniors can enjoy financial security and independence (as this is a non-recourse loan)
• seniors won't have to worry about passing on a mortgage debt to an heir

To qualify for a FHA HECM, one must be 62 years of age or older, occupy the property as your principal residence, not be delinquent on any federal debt and participate in a consumer information session given by an approved HECM counselor.  At closing, HECM borrowers must make a down payment which will be applied to satisfy the difference between the HECM principal limit and the sale price for the property, plus any HECM loan related fees that are not financed into the loan, minus the amount of the earnest deposit. 

SAMPLE TRANSACTION FOR A BUYER BORN IN 1938:

Purchase Price                                                       $300,000.00

Available Principal Limit                                      $178,546.06

Closing Costs                                                          $11,672.50

Cash Required at Closing                                    $133,126.44

They are very strict about where this down payment comes from.  It can be from such things as verified savings, retirement funds and proceeds from the sale of real estate but it may not be from any of the following:

• FHA prohibits seller contributions (also known as "seller concessions"), the use of loan discount points, interest rate buy downs, closing cost down payment assistance, builder incentives, gifts or personal property given by the seller or any other party involved in the transaction.  This includes customary charges that are normally paid on behalf of the borrower by the seller.
• Subordinate liens
• Bridge loans
• Gap financing
• Cash withdrawals from credit cards
• Personal loans
• Seller financing
• Gift funds

For seniors, buying a home is a HUGE move when done correctly.  It involves careful coordination between financial planners, a CPA, a good Realtor and a good loan officer.  Consideration as to whether a reverse mortgage should be involved or shouldn't be involved should always be evaluated as an option.

-Charles Dailey