A HECM for Purchase is the FHA insured reverse mortgage that allows seniors, age 62 or older, to purchase a new principal residence using loan proceeds from the reverse mortgage. This is a new program that became effective January 1, 2009.
Previously, if a senior wanted to use a reverse mortgage to purchase a new principal residence, they had to secure financing for the home and then turn around and pay off that mortgage with a reverse mortgage. The disadvantage was that it required two closings and the borrower incurred two sets of fees for the transactions. The new program - HECM for purchase - allows seniors to purchase a new principal residence and obtain a reverse mortgage with a single transaction and one closing.
Here is how it works: the reverse mortgage provides X dollars based on the borrower's age, appraised value, and a current interest rate (this is no different than a traditional HECM). The remaining balance MUST come from the borrower's own funds and must be enough to purchase the new property outright. In most cases, the funds will come from the sale of the borrower's existing home, although savings and retirement funds can be used. FHA is very strict on what is considered an acceptable source of funding. No gifts, no credit card advances, no seller concessions - only funds that the borrower has in savings, retirement accounts or proceeds from the sale of their home are acceptable. Seller financing is also not permitted and no subordinate financing is allowed.
An example: Let's say the Smiths, who live in a large two-story home, simply cannot maintain the home anymore and find that climbing the stairs is getting more and more difficult. They find a cute condo that is perfect for them with an asking price of $220,000. It is a one-story unit on the ground floor. The maintenance is mostly taken care of by the homeowners association. The Smiths refinanced their home a few years ago so they have a lien of $120,000 to pay off from the sales proceeds leaving them with $180,000 which is not enough to purchase the condo outright. The reverse mortgage will provide them with $141,000, so they need to put down $79,000 to equal the sales price of $220,000. That leaves them with a $101,000 nest egg and no house payments for as long as they live in the condo.
The HECM for purchase isn't necessarily for seniors who want to down-size. It can be for those who want to up-size! Here's another example: Let's say the Harpers live in a low-cost area and they want to move to a nicer neighborhood and to be near their children. Or they want to go to Arizona and live on a golf course. The new home is selling for $250,000. The sales proceeds from their home nets them $120,000. The reverse mortgage will provide them with $161,000 on the new home. They need to bring in a down payment of $89,000 which comes from the sale of their existing home. Now they have a nicer home with no mortgage (and a little cash for a rainy day)!
Here are some highlights of the HECM for purchase program:
- Borrowers will still need HUD approved counseling, just as they would have with a traditional reverse mortgage.
- Can be used to purchase an existing 1- to 4 unit property, FHA approved condo, and a manufactured home that meets HUD's guidelines (cooperatives are not allowed).
- Property must serve as principal residence
- Only HECM first and second liens against property
- Must provide monetary investment at closing from allowable funding source
- Must occupy property within 60 days
- Just like a traditional HECM, the borrower is responsible for taxes & insurance and home maintenance costs
- Unlike a traditional HECM, there is no three day right of rescission
The HECM for purchase won't meet the needs of all seniors - a hefty down payment is required. However, for those who have an existing home to sell or have funds in savings or investments, the HECM for purchase can be another financing option for the purchase of a new home. The real advantage of the program is that senior homeowners can purchase a home (and sell their old one) with no income or credit qualification and live in that home with no monthly mortgage payments for the rest of their lives.
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