A Reverse Mortgage For Purchase May Help Some Seniors Finance A New Place To Live
Most seniors take out a reverse mortgage to help them stay in their existing home as they get older. But Myra Simmons, 67, took advantage of a little-known product: She used a reverse mortgage to finance a new home.
Myra’s 83-year-old husband, Billy, was having trouble using the stairs in their two-story townhome in Fort Myers, Fla. The couple sold their home and used a “reverse mortgage for purchase” to move into a one-story house nearby last summer. “Now I take what would have been my mortgage payment and put it in savings,” says Myra, who works for the local county sheriff’s office.
The Home Equity Conversion Mortgage for Purchase was created by Congress four years ago to streamline home-buying transactions and cut costs, says Peter Bell, president of the National Reverse Mortgage Lenders Association. Before, seniors would buy a new home, incurring closing costs, and then take out a reverse mortgage on the new home, triggering new closing costs. The HECM for Purchase rolls this into one transaction and one set of closing costs.
But the loan has had a slow take-up rate, Bell says. “It’s a concept people don’t fully understand,” he says.
As with a traditional HECM, a homeowner must be 62 or older to qualify for the federally insured HECM for Purchase. You don’t make payments while you live in the house, but the loan and interest come due when you sell, move out for 12 months or more, or die.
Hecm For Purchase Summary
Now that Ive overwhelmed you with an information overload, let me simplify.
The HECM for Purchase transaction flows very similarly to a Conventional Loan purchase transaction. Many of the above-mentioned rules are actually the same as Conventional / forward loans. But youve probably noted, that there are some idiosyncrasies to be aware of.
However, once youve gone through the transaction, youll see that it really isnt so different and that there are some very nice benefits to thinking outside the box. Because the program is still young, HUD audits 100% of the HECM for Purchase files and Underwriters continue to be thorough with an extra eye on the details. Contact us with any unanswered questions.
Colorado Reverse Mortgage tries to make every assurance that everyone involved in the real estate transaction understands how the program works. We developed this page as a resource for Realtors and Builders to use at the beginning of a transaction. If you are a senior buying a home, were glad youve read this page and have a little deeper understanding. Fortunately, you dont need to memorize everything on this page. You can rely on us, your real estate broker and/or builder to handle the details and keep you informed throughout the process.
Colorado Reverse Mortgage Helping you move forward, in Reverse.
What Is A Reverse Mortgage Loan
According to Reverse Mortgage Pros and Cons by the Balance, a reverse mortgage is a type of mortgage that allows homeowners to borrow against the equity in their primary residence Retrieved from
Borrowers must be at least 62-years-of-age or older to qualify. No repayment of the mortgage is required until the borrower dies, moves out of the home for more than 12 months, or sells the house.
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Example Of A Purchase Reverse Mortgage
In this example, we will use a borrower aged 70 years old, using a reverse mortgage for home purchase with a sales price of $400,000. The required down payment is $182,000 or approximately 45% of the purchase price.
The down payment includes all upfront mortgage insurance premium and third-party closing costs. After five years making no mortgage payments there is still $210,000 in home equity, after 10 years there is still $257,000.
Should the borrower decide at a later time that he/she needs to move into an assisted care facility, they may sell the home, where the reverse mortgage balance is then repaid and the remaining said equity is theirs.
Of course, this assumes the home will appreciate at a modest 4%. Remaining equity largely depends on the homes future appreciation and whether you choose to make any type of repayment to the loan balance.
What Fees Can My Lender Charge Me
With respect to reverse mortgages under New Yorks Real Property Law sections 280, or 280-a, lenders may only charge those fees authorized by the Department in Part 79.8. All costs and fees must be fully disclosed and reasonably related to the services provided to or performed on behalf of the consumer. Specifically, a lender may charge the following fees, among others, in association with a reverse mortgage loan:
- An application fee
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Department Of Veterans Affairs Loans
VA loans are available to service members and veterans, and they can be used for manufactured and modular houses. They are particularly appealing because they allow you to buy with no money down and no monthly mortgage insurance, assuming that the lender agrees, and you meet credit and income requirements. But skipping the down payment means that youll have higher monthly payments and youll pay more in interest over the course of the term. Requirements for a VA loan on a manufactured home include:
- The home must be permanently attached to a foundation.
- You must buy the home together with the land it sits on, and you must title the home as real property.
- The home must be a primary residence, not a second home or an investment property.
- The home must meet the HUD Code and have the HUD Labels attached.
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Should You Buy A Home With A Reverse Mortgage
If you are over the age of 62, want to downsize, upsize or simply move to where your grandkids are, you should at least consider it regardless of your financial situation.
If you are living in a multi-story home and want to downsize to a single-level home, but havent because you cant qualify for a conventional mortgage, you should definitely use a reverse mortgage.
If you have a nice nest egg but are worries about depleting it if you use a conventional mortgage, you should seriously consider a reverse mortgage to help you manage your retirement finances.
If you are looking for your forever home and want to buy something that would otherwise be out of your price range, you should definitely consider a reverse mortgage. After all, you deserve to live out your golden years in comfort and dignity.
Do My Heirs Have To Pay Off My Reverse Mortgage Loan Out Of Their Own Pockets
No. Your heirs can refinance the loan balance with a traditional loan with no out of pocket costs, or they may sell the home and keep the equity. Your heirs would never have to come up with out of pocket money to pay the loan balance, which is federally insured. If the balance exceeded the value of the home, the FHA mortgage insurance would kick in and pay the difference.
Borrower Requirements Under Hecm For Purchase To Get A Reverse Mortgage Are:
- The minimum age is 62 years old.
- Borrowers must own the property outright or have a considerable amount of equity in it.
- The home must be the borrowers primary residence.
- The borrower must be able to pay the homes property taxes, insurance premiums, homeowners association dues and any other ongoing property costs.
- The borrower must have no delinquent federal debt.
The property must pass certain requirements, such as meeting all FHA standards and flood requirements.
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How To Purchase A Home That Has A Reverse Mortgage
We are looking to buy a home, and signed a contract for sale for $730,000. The house appraised for just over that amount. Afterwards, we learned that the seller owes more than that on a reverse mortgage. Does HUD/FHA need to approve the sales price before we can close? It seems that because the sales price is within 95% of the amount owed, the seller would be able to complete the transaction. Does HUD/the lender get to keep the difference between what is owed and what the sales price will be?
Are you sure that it is a HUD HECM? That balance seems very high for the HUD loan and while it is possible that it was one of the earlier fixed rate loans for an older borrower with a full draw, it would be very difficult to get that high otherwise unless it was a jumboorproprietary reverse mortgage and then it is a whole different animal.
I cant say for sure based on what information I have here. If the loan was done on a proprietary or private program, I could not make the same assurances as to what the options might be.
If it was the HUD program, if the borrowers have passed, the lender would allow the borrowers heirs to pay the loan off and keep the home at 95% of the current market value but there is no option to sell the home for a short sale and let the heirs keep 5% of the sale proceeds.
Since that number is a negative number indicating a loss and not a surplus on the sale, there is nothing left to keep.
When The Loan Has To Be Repaid
With a HECM, the loan typically has to be repaid when one of the following events occurs:
- the borrower dies
- the home is no longer the borrower’s principal residence
- the borrower sells the home or transfers title, or
- the borrower defaults on the loan terms, like by failing to keep up with insurance premiums or property taxes.
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Getting Approved For A Loan
We acknowledge that lending institutions in the marketplace often find that our modular homes are outside of their relevant lending guidelines. As everyone has different circumstances, it is important to remember that the funding step to purchasing a home always presents a hurdle, irrespective of the type of home you choose to build. It may seem a daunting experience, but be open and patient with your lender and this will help keep the process as smooth as possible.
With this in mind, wed like to remind you that help is always at hand you are welcome to call Hoek Modular Homes and chat about your situation. Were able to discuss and explain any requirements with your preferred lender and look forward to assisting you with realising the dream of your new home!
What Should I Remember When Thinking About A Reverse Mortgage
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Can I Buy A House With A Reverse Mortgage On It
Yes, you can but the loan is due and payable and must be repaid. This is often overlooked at times when someone buys a home at auction where the purchaser thinks they are getting a very low price, only to find out later there is a reverse mortgage on the home. Then to make matters worse, the outstanding balance on the reverse mortgage may be equal to the value of the home but even if not, that loan is due and payable and the purchaser has no additional funds with which to pay the loan off. If you plan to buy a home that has an existing reverse mortgage, just remember that the loan will need to be paid in full after the original borrower sells the property pursuant to the terms of the legal documents.
How To Get Your Hecm For A Purchase Loan
When you are ready to apply for HECM for a Purchase Loan, you will need to find a lender. Dont 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 a Purchase Loan requires a down payment. In some cases, you can expect a 50% discount on the purchase price of the home. Because your prepayment cannot be Borrowed, youll have to use your savings, gifts, or proceeds from the sale of your home to get the cash you need.
You will also be required to participate in a mentoring program facilitated by the Department of Housing and Urban Development. A counselor can help you understand the consequences of getting a reverse mortgage.
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The American Mortgage Market Is Merciless
In the 1990s, long-standing legislation was repealed which allowed American banks to sell and offer their mortgages as investments. This created an incentive in the market and allowed them to issue a vast number of reverse mortgages.
In comparison, in Canada there are two reverse mortgage lenders, those being Equitable Bank and Home Equity Bank. Canada doesnt allow or have the same market landscape as America, which uses reverse mortgages to raise their share prices creating competition and increasing the probability that a reverse mortgage will be given to someone who cant carry it, thus ending in default.
This is one of the driving factors that allowed the Canadian banking system to navigate through the 2008 financial crisis in one piece. Canada has established strong consumer safeguarding, protecting citizens from any sort of lending incentives.
How Do Reverse Mortgages Work
When you have a regular mortgage, you pay the lender every month to buy your home over time. In a reverse mortgage, you get a loan in which the lender pays you. Reverse mortgages take part of the equity in your home and convert it into payments to you a kind of advance payment on your home equity. The money you get usually is tax-free. Generally, you dont have to pay back the money for as long as you live in your home. When you die, sell your home, or move out, you, your spouse, or your estate would repay the loan. Sometimes that means selling the home to get money to repay the loan.
There are three kinds of reverse mortgages: single purpose reverse mortgages offered by some state and local government agencies, as well as non-profits proprietary reverse mortgages private loans and federally-insured reverse mortgages, also known as Home Equity Conversion Mortgages .
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Term Or Tenure Payments
One of the most well known payment methods associated with reverse mortgages are monthly payments. Both “term” and “tenure” payments offer fixed monthly payments that will remain unchanged regardless of fluctuations in your home value, with only a slight difference between the two.
This type of payment method allows borrowers to receive fixed payments for an agreed upon amount of time. Term payments are a great way to expand on your retirement strategy.
For example, did you know that Social Security benefits increase the longer you delay receiving them? With a reverse mortgage, you might be able to use the funds to hold off a little while longer on receiving Social Security benefits. All you would have to do is consult with your lender on the amount of money you are eligible to receive, and determine how many years you can gain adequate funding from your home equity before accepting your hard-earned benefits!
Tenure payments work just like term payments, with one difference. This option lets you receive fixed payments for as long as you live in your home and its your primary residence. Under the tenure plan, even if your loan balance is higher than the current value of your home, your fixed payments will not change or be stopped. In fact, the only time tenure payments stop is if the recipient passes away or leaves the home for good.
Why Reverse Mortgages Can Be Good For Seniors
Unlike traditional mortgage loans, a reverse mortgage has no monthly payment requirements. This allows the borrower to buy a home without needing to decimate their retirement savings or other income to make regular monthly payments. The loan also provides seniors with the opportunity to purchase a home that is better suited to their needs or a more desirable retirement location.
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How Much Can You Borrow With A Reverse Mortgage
The proceeds that youll receive from a reverse mortgage will depend on the lender and your payment plan. For an HECM, the amount that you can borrow will be based on the youngest borrowers age, the loans interest rate, and the lesser of your homes appraised value or the FHAs maximum claim amount, which is $970,800 as of Jan. 1, 2022.
However, you cant borrow 100% of what your home is worth, or anywhere close to it. Part of your home equity must be used to pay the loans expenses, including mortgage premiums and interest. Here are a few other things that you need to know about how much you can borrow:
- The loan proceeds are based on the age of the youngest borrower or, if the borrower is married, the younger spouse, even if the younger spouse is not a borrower. The older the youngest borrower is, the higher the loan proceeds.
- The lower the mortgage rate, the more you can borrow.
- The higher your propertys appraised value, the more you can borrow.
- A strong reverse mortgage financial assessment increases the proceeds that youll receive because the lender wont withhold part of them to pay property taxes and homeowners insurance on your behalf.
How much you can actually borrow is based on whats called the initial principal limit. The federal government lowered the initial principal limit in October 2017, making it harder for homeowners, especially younger ones, to qualify for a reverse mortgage. On the upside, the change helps borrowers preserve more of their equity.