Living off of a limited income can be scary, but for many seniors, it’s a daily reality.
In many cases, social security, retirement savings, and pensions are simply not enough to pay for living expenses.
One source of income for seniors who own their home or have a large share of equity is a reverse mortgage. Essentially, this system allows someone to sell back equity in their home, generating money that they may need for daily life, bills, and expenses.
For someone seeking to use their equity and move to a new home, the HECM for Purchase program, which is a form of reverse mortgage, can help you turn current equity into a new home.
Using a HECM Reverse Mortgage to Purchase Your Home
HECM loans are slightly different that traditional reverse mortgages. Standing for “Home Equity Conversion Mortgages,” HECM is commonly called a reverse mortgage. This is a program insured by the Federal Housing Administration that enables seniors to use equity in the home to get tax-free money without the need to make monthly mortgage payments. With this program, borrowers stay in their home, creating many benefits for seniors who may be struggling financially.
There is, however, another option that is slightly different. Called the “Home Equity Conversion Mortgage for Purchase,” (or “HECM for Purchase”) this program was introduced in 2009, allowing homeowners to purchase a new home with funds generated by a reverse mortgage.
To qualify, the borrower must be at least 62 years old and have a strong equity in the home. (The specific percentage can vary.) Essentially, if you are old enough, you must have enough funding to make the initial down payment, which may be 35 to 50%, depending on many different factors. As usual, you will be required to pay for taxes, insurance, and regular upkeep on the home.
The amount of money you can receive with a HECM for Purchase will change with many different variables. These variables include the age of the borrower, current interest rates, the appraised value of the home, and the maximum lending limit. In most cases, you will find that the older you are, the more money you will be eligible to receive through this program.
Why Use an HECM?
So why would someone decide to use this program? What are the advantages of using an HECM or traditional reverse mortgage to purchase a home? Many people, especially the elderly, decide to use this program to help with downsizing. The funding that comes through can be enough to purchase a smaller home that is more conducive to the elderly. For example, it may not have steep steps or multiple levels, making everyday living slightly easier.
In many cases, you can eliminate monthly mortgage expenses. It’s possible to generate enough money from the sale of their property to pay the larger down payment required for an HECM for Purchase, as well as other real-estate costs.
With these programs, you can stay in a home that better fits your needs. You can move into a home that has a single story or is wheel-chair accessible. You could also move to a different neighborhood, one that is closer to friends or family, which can be beneficial at an older age.
It may also allow you to purchase a new home while preserving the cash you have saved. When properly designed, the program can create a situation where you do not have to pay monthly mortgage payments, which can be extremely beneficial for people on limited incomes, social security, and pensions.
Properties that Qualify for HECM
In most cases, you will be able to purchase a wide variety of homes using the HECM system. The most common type of home that is generally purchased with HECM funding is a single-family home. However, the program can be used to purchase town houses and condominiums. Also, if the building and location is approved by the FHA, you can use HECM to purchase a mobile home or manufactured home. Be sure to talk with a professional to see if the specific property you are considering would apply for this program.
Properties That Do Not Qualify
Unfortunately, there are some restrictions to the program, and you can’t just purchase any property you choose. Co-ops, for example, are not available for purchase through this system. Also, properties that have been constructed less than one year before the purchase date will not qualify. Many investment properties are off limits; for example, you cannot purchase a bed and breakfast, even if you would live on the property, with the HECM program. If you are considering a mobile home or manufactured home, it will only be eligible if the property has been certified by the FHA.
Drawbacks of the HECM Program
The program sounds pretty outstanding, but there are some clear drawbacks. The biggest, as you may have guessed, is the down payment requirements. Simply put, these programs require a large down payment, which can be more than 50% of the property value. This will add up to tens of thousands of dollars and could be as high as $100,000 or more, depending on the home you wish to purchase. Few people, especially retirees on limited incomes, can spare this funding.
As with regular reverse mortgages, you cannot have another loan against your home, so if you have a second mortgage, you will likely be unable to use this program.
Finally, there is the concern for negative effects on your estate. If you use a reverse mortgage, it can create complications on your estate and could mean your home (or the sale of your home) will not go to your heirs but the lender who participated in your reverse mortgage.
If you plan to move within the next five years, it’s usually a good idea to avoid reverse mortgages. This is a general recommendation that helps you get the most from your home’s equity without paying for unnecessary fees and real estate costs.
Talk with a Professional to Learn More
Before you make a decision, be sure to talk with a reverse mortgage and real estate expert who can show you the details, benefits, and risks associated with HECM for Purchase and other reverse mortgage options.
As always, discuss the matter with friends and family, as well as an industry expert, so you can make an informed, confident decision on your financial future.
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