Individuals entering retirement face an interesting dilemma: Age in place or move elsewhere?
While aging in place is a reasonable option for those with adequate savings, a seller’s market creates an attractive opportunity for older homeowners who want to downsize or relocate to a more retirement-friendly location.
That’s why knowing about a Home Equity Conversion Mortgage (HECM) for Purchase can give real estate agents a competitive advantage when working with this demographic.
This FHA-insured home financing program allows older borrowers to buy a new home using loan proceeds from a reverse mortgage — but with fewer financial worries.
How buyers can benefit
As leaving the workforce becomes a reality, many retirees find themselves asking, “Is this my forever home?” A HECM for Purchase offers them the flexibility to move into a home that’s better suited to their changing needs. And that’s just the beginning:
It improves purchasing power
A HECM for Purchase makes buying a higher-priced home (upper limit for HECM for purchase loans is $822,375) with desired amenities more affordable, because borrowers can use the funds from the reverse mortgage to pay for it. If buyers are looking for a home in another state, for example, with plenty of extra room for family to visit, a HECM for Purchase can help make that goal attainable.
There is a flexible monthly mortgage payment feature
Monthly principal and interest payments are optional. This frees up cash flow each month and helps retirees conserve more of their retirement savings so investments can continue to grow. The loan doesn’t have to be repaid until the home is sold or no longer used as the primary residence.
Borrowers continue to own the home
Even while leveraging equity and deferring payments, the title remains in the borrower’s name. To remain in good standing, there are loan obligations that must be met, including keeping up with basic home maintenance and paying property taxes, insurance, homeowner association dues and other ongoing property costs.
Not a universal solution
Like any financial tool, whether it’s a good fit depends on the borrower’s unique situation.
More upfront costs
With a HECM for Purchase, there are out-of-pocket costs and fees to consider. Because this is a federally insured FHA loan, there will be a charge for upfront mortgage insurance premiums. Closing costs will also vary based on the purchase price, location, borrowed amount and interest rate.
Borrowers will also have less equity than if they didn’t have a HECM for Purchase. Home equity decreases as the loan balance increases over time with interest if the homeowner decides to make no payments.
Impact on heirs
When the loan comes due upon the borrower’s (or eligible non-borrowing spouse’s) passing, heirs must pay off the loan if they want to keep the home. They also have the option of selling the home or letting the lender take it over, freeing them of financial obligations.
To reap the benefits of a HECM for Purchase, borrowers must first meet basic qualifications:
- Be a minimum of 62 years old
- Live in the home as their primary residence
- Be free of delinquent federal debt
The borrower is also required to make a down payment of roughly 25% to 75% of the purchase price, contingent upon a number of factors, including age, home price and interest rate. If the buyer is 62 years old, for example, and they want to purchase a $350,000 home, they’ll need a down payment of approximately $216,500. If they’re 75, they’ll need approximately $188,000.
It’s also important to note that not every home will qualify for a HECM for Purchase. Single-family homes, townhomes and FHA-approved condominiums are eligible if they’re used as the primary residence. However, mobile homes, cooperative units, commercial properties, working farms and investment properties are typically ineligible.
Dominate the current market and beyond
Today’s record-low interest rates won’t be around forever. And cost-conscious retirees will be far more sensitive to eventual increases than working families.
Real estate professionals who understand this available financing option can establish themselves as trusted advisors, helping retirees enjoy a more comfortable retirement in a better-suited home.
Joe DeMarkey is the Strategic Business Development Leader at Reverse Mortgage Funding LLC, NMLS#1019941. Joe currently serves as chairman of the Executive Committee at the National Reverse Mortgage Lenders Association (NRMLA), where he has served on the Board of Directors since 2003, and co-chaired from 2007-2009 and 2012-2018. Connect with him on Facebook and LinkedIn.