50% Down and No Monthly Payment- You're Kidding!
Buying a home with a Reverse Mortgage Purchase loan: What an amazing concept!
Purchasing a home with a reverse mortgage is done by using the same program you use when refinancing but applying it in a slightly different way. The homeowner is still required to have equity in the home, however instead of accumulating that equity over time, they are required to put the equity into the home in the form of a down payment at the time of purchase.
An example of a reverse mortgage purchase transaction would be a sale price of $200,000 with a borrower age 62 and a loan amount of approximately $100,000. The borrower would put down $100,000 and finance the remaining $100,000 with a reverse mortgage. The reverse mortgage balance would grow over time but the initial equity (down payment) would be offsetting the loan balance. The same loan to value is used and the same loan stipulations apply. Borrowers must maintain their taxes and insurance and any homeowners association dues that apply.
The benefit of buying a home with a reverse mortgage is that you do not have to pay cash for a home in order to avoid making a monthly payment. Many seniors cannot qualify for a purchase loan so downsizing or upsizing can be accomplished without having to qualify or make a new mortgage payment. The money you save by not paying 100% cash for your house can be used to make improvements, fund healthcare, living expenses or lifestyle enhancement. Qualification is based on age, home value, occupancy and your ability to pay your taxes and insurance
During the life of the reverse mortgage purchase loan there are no monthly payments, but there is interest accruing onto the loan balance. Since the loan balance is increasing there must be a significant amount of home equity at the onset of the loan. The goal of the HECM program is to loan as much money as possible while still owing less than the property value at the end of the loan. The loan does carry FHA mortgage insurance in case the final loan balance does exceed the home value. If this does happen the mortgage insurance pays the deficiency and the borrower and their heirs are not responsible
The reverse mortgage loan amount is determined by an FHA appraised value. Other factors that determine loan amount are the interest rate and the youngest borrower’s age. Homeowners age 62 will qualify for a lower loan to value than a borrower who is older. Actuarial tables are used to determine life expectancy and the likelihood that the loan balance will exceed the appraised value at the conclusion of the loan.
Refinancing with a reverse mortgage allows a homeowner to use some of the equity they have accumulated without having to sell the property to do so. If there is a current mortgage on the home the mortgage is paid off and the balance of the approved loan amount is available for the homeowner to draw. If there is no current mortgage than the entire approved loan amount is available to the homeowner. The available amount is normally around 50% or so at age 62 and increases with age, and there are fixed and adjustable rates.
To access a calculator to determine the funds available on a reverse mortgage visit my website at www.nadinepetel.com