Reverse mortgages are popular among seniors. Through the Home Equity Conversion Mortgage (HECM) Program, retirees can turn their home equity into a monthly source of income without moving out of their houses. And with their extra cash, seniors can remodel their homes and pay for their living expenses. If you’re interested in buying a new home in retirement, a reverse mortgage can cover the cost of that, too. That’s where the HECM for Purchase Program comes into play.
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What Is the HECM for Purchase Program?
The HECM for Purchase Program makes it easy for retirees to purchase a new primary home. It streamlines the home-buying and selling processes by consolidating them into a single transaction. And it saves seniors money by reducing their cost of living. Those who downsize can use their leftover cash for other purposes.
If you qualify for an HECM for Purchase Loan, you won’t have to pay a monthly mortgage bill. In fact, you won’t have to pay back your loan until you move out or die. And since it’s a non-recourse loan that’s backed by the FHA, you won’t have to pay back more than the value of the home (even if the loan balance is higher).
Who Qualifies for an HECM for Purchase Loan?
A homeowner must be at least 62 years old to qualify for an HECM for Purchase Loan. The home you buy must be your primary residence and you must purchase it within the 60-day period after the closing date.
Under the HECM for Purchase Program, your new home should also be a single-family home, a two- to four-unit home or a condo that meets the FHA’s requirements. Seniors may also be able to buy a newly constructed home through the program if there’s documentation confirming that it can be occupied.
The amount you can borrow through the program will depend on several factors. For example, your lender will consider the age of the youngest borrower (or the non-borrowing spouse), the home’s appraised value, the size of your down payment and current interest rates. Fortunately, neither your credit score nor your household income will affect your chances of qualifying for an HECM for Purchase Loan. Generally, the older you are, the more money you’ll be able to borrow.
How to Get Your HECM for Purchase Loan
When you’re ready to apply for an HECM for Purchase Loan, you’ll need to find a lender. Don’t forget to explain that you intend to buy a new home with the proceeds from your reverse mortgage. That way, your lender can figure out how much you can borrow based on your financial situation.
Unlike a standard reverse mortgage, the HECM for Purchase Loan requires a down payment. In some cases, you may be expected to put down 50% of the home’s purchase price. Since the funds for your down payment cannot be borrowed, you’ll have to use your savings, gifts or the proceeds from your home sale to come up with the cash you need.
You’ll also be required to participate in a counseling program facilitated by the Department of Housing and Urban Development. A counselor can help you understand the consequences of taking out a reverse mortgage loan.
Costs to Consider
In addition to a down payment, you’ll also be responsible for paying closing costs, property taxes and other fees. You’ll need to pay mortgage insurance premiums, too. Your first payment will be due upfront and the rest will be paid over the life of the loan.
While paying closing costs may be unavoidable, they can be negotiable. That’s why it’s important to shop around for the best rates. Of course if the costs of taking out an HECM for Purchase Loan outweigh the benefits, you may need to consider other financing options.
Using an HECM for Purchase Loan to buy a new house may not be a good idea unless you plan to live there for at least five years. If you take out an HECM for Purchase Loan but you can’t keep up taxes and insurance payments, your lender can foreclose on your home.
The Takeaway
If you want to move or downsize in retirement, an HECM for Purchase Loan might be a good fit for you. Before you commit to taking on a new loan, however, it’s best to consider whether that’s the best financial move for you and your family.
For further financial guidance, consider consulting a financial advisor. A matching tool like SmartAsset’s SmartAdvisor can help you find a person to work with to meet your needs. First you’ll answer a series of questions about your situation and goals. Then the program will narrow down your options from thousands of advisors to up to three fiduciaries who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.
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