Buying a Home With a Reverse Mortgage

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:

Date Total HECM for Purchase
2015-01-01 228
2015-02-01 176
2015-03-01 162
2015-04-01 151
2015-05-01 159
2015-06-01 179
2015-07-01 201
2015-08-01 259
2015-09-01 274
2015-10-01 243
2015-11-01 198
2015-12-01 231
2016-01-01 156
2016-02-01 185
2016-03-01 187
2016-04-01 196
2016-05-01 144
2016-06-01 179
2016-07-01 210
2016-08-01 247
2016-09-01 191
2016-10-01 189
2016-11-01 198
2016-12-01 223
2017-01-01 215
2017-02-01 183
2017-03-01 232
2017-04-01 213
2017-05-01 236
2017-06-01 238
2017-07-01 214
2017-08-01 263
2017-09-01 231
2017-10-01 270
2017-11-01 264
2017-12-01 227
2018-01-01 253
2018-02-01 225
2018-03-01 202
2018-04-01 172
2018-05-01 181
2018-06-01 179
2018-07-01 178
2018-08-01 246
2018-09-01 209
2018-10-01 236
2018-11-01 182
2018-12-01 137
2019-01-01 131
2019-02-01 249
2019-03-01 163
2019-04-01 165
2019-05-01 190
2019-06-01 189
2019-07-01 245
2019-08-01 207
2019-09-01 199
2019-10-01 224
2019-11-01 194
2019-12-01 149
2020-01-01 236
2020-02-01 225
2020-03-01 182
2020-04-01 110
2020-05-01 294
2020-06-01 202
2020-07-01 206
2020-08-01 226
2020-09-01 222
2020-10-01 172
2020-11-01 193
2020-12-01 225
2021-01-01 261
2021-02-01 200
2021-03-01 183
2021-04-01 178
2021-05-01 148
2021-06-01 186
2021-07-01 155
2021-08-01 140
2021-09-01 180
2021-10-01 207
2021-11-01 196
2021-12-01 185
2022-01-01 194
2022-02-01 142
2022-03-01 200
2022-05-01 153
2022-04-01 164
2022-06-01 206
2022-07-01 181

Top Puchase Lenders

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

Rank Lender Total HECM for Purchase
1 SYNERGY ONE LENDING INC. 1,564
2 FAIRWAY INDEPENDENT MORTGAGE CORPORATION 1,389
3 REVERSE MORTGAGE FUNDING LLC 1,056
4 MUTUAL OF OMAHA MORTGAGE INC. 843
5 CHERRY CREEK MORTGAGE CO INC 719
6 AMERICAN ADVISORS GROUP 568
7 REVERSE MORTGAGE SOLUTIONS INC 329
8 FINANCE OF AMERICA MORTGAGE LLC 246
9 OPEN MORTGAGE LLC 236
10 HIGH TECH LENDING INC 232
11 FINANCE OF AMERICA REVERSE LLC 227
12 AMERICAN PACIFIC MORTGAGE 184
13 BROKER SOLUTIONS INC 174
14 TOWNEBANK 174
15 LIBERTY HOME EQUITY SOLUTIONS INC 163
16 V.I.P. MORTGAGE INC. 155
17 LONGBRIDGE FINANCIAL LLC 144
18 HOMEBRIDGE FINANCIAL SERVICES INC 132
19 VERITAS FUNDING LLC 120
20 MOVEMENT MORTGAGE LLC 119
21 PREMIER MORTGAGE RESOURCES LLC 119
22 SUN AMERICAN MORTGAGE CO 118
23 ONE REVERSE MORTGAGE LLC 117
24 PULTE MORTGAGE LLC 115
25 REVERSE FREEDOM LLC 111

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