Phil has done a good job with a short amount of words on How to Buy a House Using a Reverse Mortgage.
This is a well-written post about a complex subject that can definitely benefit some specific seniors. I'm re-blogging it because I feel this is a subject that can definitely serve my potential clients who are 62 and over who want to buy a home.
How to Buy a House Using a Reverse Mortgage
Why pay double closing costs, when you can do both at the same time? This program is called the Reverse Purchase or Reverse Mortgage for Purchase. The program began at the beginning of 2009, and believe it or not very few people know it exists and those that do know about it don’t fully understand how it works.
Here is how it works for a current owner:
Let’s start with the example of the traditional Reverse Mortgage, which is done when someone already owns the home, has equity, and either wants to cash out or pay off their current mortgage without requiring future payments:
So John and Sally are 62 years old.
Their value is 200k, and they owe 100k.
Based on their age they have a benefit (or available loan amount) at approximately 60% of their value, which is 120k in this example.**
SO THEY USE THE MORTGAGE PROCEEDS OF 120K TO PAY OFF THEIR CURRENT MORTGAGE (eliminate their payment) AND CASH OUT THE REMAINING 20K TO USE AS THEY PLEASE.
Of course, if they owe nothing, then they keep the entire 120k.
Reverse Purchase NOT selling another property:
Using the same numbers from above; John and Sally must CREATE THE EQUITY IN THEIR NEW PURCHASE of a 200k house to qualify for the Reverse Mortgage for Purchase.
What does that mean?
If they needed 40% equity in the previous example, which was 80k of the 200k value, to qualify for the Reverse Mortgage Refinance, then their new down payment is 80k. They have just created the 40% equity with the down payment.
They will never need to make a payment on the NEW 120k mortgage because it will be a Reverse Mortgage!!!
Of course, they would need access to 80k in a current retirement fund and/or cash that they can use for the purchase.
COMMON MISUNDERSTANDING: Some people explain this as something more complicated than it is. They say, “You have the down payment plus closing costs,” and it scares them because they think it 40% plus closing. So when I gave the figure of 80k, that 80k INCLUDES ALL closing costs. It’s hard to visualize, but if and when I sit down with the borrower I can explain it in very easy terms.
Reverse Purchase when using funds from the sale of another property:
John and Sally are selling their current home for 400k. We will say that the 400k is their net proceeds after all costs of selling.
Normally they would use 200k of that 400k to buy the new house so that they can retire without a mortgage payment, but then they only have 200k remaining for savings or investments.
Why not keep 320k from the 400k sale instead of only 200k, and still not have a mortgage payment on the new purchase? Just refer to the example above when John and Sally purchased without selling a home.
John and Sally only use 80k from the 400k to buy the new house.
Thank you for taking the time to read this, and I hope it answered a lot of questions or opened your mind to a new concept for Realtors, buyers, and borrowers.
**All figures given are rounded estimates. The Reverse Mortgage does not give exact percentages based on age as there are many factors at play, such as value, age, current mortgage, costs, and program type.
Information and content in this blog is original to Phil Stevenson.
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Copyright © 2010 by Phil Stevenson