Reverse mortgages historically have been the "loan of last resort" for Seniors, used to allow folks to stay in their home for the rest of their lives without ever making another mortgage payment and in many cases, providing income or a lump sum to live on.
But did you know that a Reverse Mortgage can be used to PURCHASE a home?
For some Seniors, the FHA Home Equity Conversion Mortgage (HECM) for Purchase is a Reverse Mortgage that could be an incredible tool, allowing those who have enough equity or assets and want to finish their years in a different home than the one they are currently living in without ever making another mortgage payment.
Let's take a look at how it works:
Jack is 71, retired, has $100,000 in a retirement account, very little savings, and does not want to live in his current home. So Jack calls his Realtor, who sells his current home and Jack nets $150,000. Jack has found the final home he wants to buy but the price is $400,000.
The problem: Jack's only current income is a small social security check; it is enough to pay his bills, but not enough to qualify for a $100,000 home loan. He does not want to take any money out of his retirement account. He has one more strike against him. He has terrible credit caused by medical bills that he's paid off, but some of those bills first went into collection and wrecked his credit scores for years to come. So even if he had enough income, his very low credit score would not allow him to qualify for a home loan.
The solution: an FHA Reverse Mortgage to purchase his new home. Jack won't have to worry about his current credit scores as a Reverse Mortgage does not use a credit report. He doesn't have to worry about income because he will never make a mortgage payment. All Jack needs to do is bring $143,094.89 to closing to purchase the $400,000 home he wants to purchase. Once the transaction closes, he will live in the home for the rest of his life and never make a mortgage payment. The only thing he will pay is a monthly $30 servicing fee.
And when Jack passes, his heirs simply pay off the Reverse Mortgage balance from the sales of the proceeds from the home and they'll get whatever equity is left.
Here is the example by the numbers:
Sales Price/Appraisal: $400,000
Reverse Mortgage Limit: $279,200
FHA Insurance: $8,000.00
Origination Fee: $6,000.00
Other Fees: $3,286.25
Total Closing Costs: $17,286.25
Set-Aside Servicing: $5008.64
Funds from Borrower: $143,094.89
Reverse Mortgage Funds: $256,905.11
Monthly Mortgage Payment: $0
While Reverse Mortgages are not for everyone, they clearly can play an important role for some Seniors who are house rich and cash poor, and also for those Senior that have found a new home to live in for their remaining years and never have a mortgage payment.
Finally, keep in mind that the Reverse Mortgage process is more cumbersome and time intensive because of all the steps and consumer protections that now are required, so don't look for this to be a tool for a quick sale.
Golf Savings offers Reverse Mortgages programs from all the largest RM players (Bank of America, Senior Lending Network and Financial Freedom) and we have a Reverse Mortgage Specialist at our Port Orchard (Bainbridge is a satellite). Just give me a call at 206-866-1220 and I will make the introduction.
A GREAT CONSUMER GUIDE TO REVERSE MORTGAGES FROM THE AARP
This 52-page booklet is at: http://assets.aarp.org/www.aarp.org_/articles/revmort/homeMadeMoney.pdf
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