Seniors have been using reverse mortgages, primarily the Home Equity Conversion Mortgage (HECM) program, to tap into their home equity since the 1980s. In most cases, the loan is taken out on the borrower’s longtime home. It’s the home in which he or she has built equity through years of paying a mortgage; the borrower wants to continue living there for as long as possible. This is the scenario most of us envision when we think about a reverse mortgage.

While this is the most popular use, the HECM loan is in fact much more flexible. In 2008, as part of the Housing and Economic Recovery Act of 2008, the United States Federal Housing Administration (FHA) created a program that lets seniors use the proceeds of a reverse mortgage to buy a home – the Home Equity Conversion Mortgage (HECM) for Purchase Program. If a homeowner qualifies, he or she can use a reverse mortgage to buy a home without the need for a forward mortgage.

Let’s dig into how it works.

Click here to get more information about buying a home with a reverse mortgage and speak to a specialist, absolutely free.

Using a HECM Loan to Buy a New Home

There are many reasons someone may want to use the HECM for Purchase program. In our experience, the most common is that the homeowner lives in a home with significant equity but no longer feels comfortable there. There can be countless reasons:

1. House is too small for the grandchildren
2. House is too big now that the children have left the nest
3. Painful memories from death of spouse or child
4. House is too hard to get around
5. HOA issues

This list can go on and on. Of course, it could be as simple as the homeowner finding a different house he or she likes better. Regardless of the reason, a reverse mortgage mortgage can help to purchase a new home, provided the borrower can make a substantial down payment – typically 45-62% of the purchase price. While these funds often come from the sale of a different home, the borrower can use cash on hand or money made from the sale of other assets to make the down payment as well.

How The HECM for for Purchase Program Works

The homebuyer informs the lender that he or she desires to purchase a new home using a reverse mortgage. The reverse mortgage lender calculates the proceeds that the homeowner would be qualified to receive through the HECM loan if the borrower already owned the property.

Here’s how the lender determines if you qualify and, if so, the size of the loan proceeds:

• Homeowner(s) age – you must be 62 or older
• Appraised value of the new home
• Prevailing interest rates and the FHA’s lending limits

Now, the lender will calculate the proceeds that you are eligible to receive (less the cost of the HECM) and subtract this amount from the purchase price. What’s left over is the down payment that you will be required to make to buy the home.

If the homeowner qualifies for the money necessary to purchase the new home and can make the down payment, he or she can move forward with the loan. From there, everything works in much the same way it does for other HECM borrowers. Once the loan has been obtained, the standard parameters of the typical reverse mortgage still exist:

• The borrower must continue to live in the home as his or her primary residence
• The borrower must continue to pay taxes & insurance
• The home must be well maintained

Click here to get more information about buying a home with a reverse mortgage and speak to a specialist, absolutely free.

Eligible Property Types

For the most part, property eligibility is the same as for traditional HECM loans:

1. Single family and 2-4 unit, owner occupied home
2. Condos that meet FHA approval
3. Certain manufactured homes

Additionally, HUD provides the following guidance for lenders:

• The home must be the borrower’s primary residence
• Construction on the home must be complete, and it must be ready to live in
• Proceeds from a reverse mortgage can’t be used to acquire the property on which the home is built
• The HECM loan is in the “first lien position”, meaning any construction or home purchase loan has been paid off

Ineligible Property Types

According to HUD, the following types of homes / properties are not eligible for this program:

1. Co-ops
2. Newly constructed homes without a Certificate of Occupancy or equivalent
3. Boarding houses & bed and breakfasts
4. Manufactured homes built before 6/15/1976
5. Manufactured homes built after 6/15/1976 that don’t meet the Manufactured
   Home Construction Safety Standards

HECM for Purchase Example

Reverse mortgages can be confusing, and this program makes things a bit more complicated. Let’s look at an example to try to make things a bit clearer. Please note that while we’ve tried to keep things realistic, this is just a rough estimate to illustrate how a HECM for Purchase might work. Actual totals will vary depending on the borrower’s age, the interest rate, the specific lender and other factors.

Assume that you are a 70 year old looking to purchase a new home for any of the reasons that we listed previously, perhaps because your house is simply much bigger than what you need right now. You decide to purchase a new home that costs (and is appraised at) $325,000. Let’s also assume that you can obtain a reverse mortgage at an adjustable interest rate of around 5.125%. Using our purchase calculator, we’ll make the following estimates:

Your age: 70

Home Value: $325,000-349,000

Rate (%): 5.125

And receive the following result:

Estimated Funds Available: $148,850

Estimated Costs: $6,500 + $2,500 + $1,400 = $10,400

Updated Estimate: $148,850 – $10,400 = $138,450

Our updated estimate has removed estimated closing costs, origination fee, and mortgage insurance premium. To calculate the down payment, we’ll subtract this amount from the purchase price:

Estimated Down Payment: $325,000-$138,450 = $186,550

This works out to a little over 57% of the purchase price, right in the 45-62% range that we mentioned earlier.

How Popular is the Reverse Mortgage for Purchase Program?

How popular is the HECM for Purchase Program among eligible borrowers? Until late 2012, HUD’s data did not clarify whether a particular loan was a ‘Traditional’ HECM or one being used to buy a home. However, since October of 2012 we count over 10,000 of these loans. There are around 100-300 new ones endorsed each month. Here are the HECM for Purchase loans originated per month since 2015:

Top HECM for Purchase Lenders

Here is a list of the top purchase lenders by origination totals since 2015:

Click here to get more information about buying a home with a reverse mortgage and speak to a specialist, absolutely free.

More Resources

U.S. Department of Housing & Urban Development, MORTGAGEE LETTER 2008-33: HUD outlines the details of the HECM for Purchase Program

U.S. Department of Housing & Urban Development, 2007 Mortgagee Letters: A few of these letters, particularly 07-06, lay out further details of the program