A reverse mortgage can also be used to buy a home.
A lot of people know that a reverse mortgage can be used to access equity in a home they already own, but fewer people realize that it can also be used to help purchase a new primary residence.
This is commonly called a HECM for Purchase when using the FHA-insured reverse mortgage program.
For the right borrower, it can be a useful way to buy a home while keeping more cash available and avoiding a required monthly principal and interest mortgage payment.
It is not the right solution for everybody, but it can make a lot of sense in the right situation.
How Does a Reverse Mortgage Purchase Work?
The basic idea is pretty simple.
The borrower contributes part of the purchase price with their own funds.
The reverse mortgage provides the rest of the financing.
For example, if someone is buying a home for $600,000, they may not need to pay the full $600,000 in cash.
Depending on age, interest rates, program guidelines, and other factors, the reverse mortgage may provide a portion of the purchase price and the borrower brings in the rest.
That can allow someone to buy a new home and still keep a significant amount of cash available for other needs.
The exact amount the borrower needs to bring in is different for every transaction.
Who Can Use a Reverse Mortgage to Buy a Home?
For a traditional HECM for Purchase, the borrower generally must meet the normal HECM eligibility requirements.
That usually includes:
- Being at least 62 years old
- Purchasing the home as a primary residence
- Completing HUD-approved reverse mortgage counseling
- Meeting financial assessment requirements
- Having enough funds available for the required down payment and closing costs
- Purchasing an eligible property
There are also proprietary reverse mortgage programs that may have different age requirements and guidelines.
Depending on the lender and state, some proprietary programs may start as young as age 55.
How Much Down Payment Is Required?
This is one of the biggest questions people have.
There is no one down payment percentage that applies to every reverse mortgage purchase.
The amount the borrower needs to bring in depends on factors such as:
- Age
- Purchase price
- Home value
- Interest rates
- Type of reverse mortgage
- Program guidelines
In general, the older the borrower, the larger the percentage of the purchase price that may be available through the reverse mortgage.
That means an older borrower may need to bring in less cash than a younger borrower purchasing the same property.
The exact numbers have to be calculated for the individual transaction.
Why Would Someone Use a Reverse Mortgage to Purchase a Home?
There are a lot of reasons.
Some of the most common include:
- Downsizing
- Moving closer to family
- Relocating to another state
- Buying a single-story home
- Moving into a lower-maintenance property
- Purchasing a home better suited for retirement
- Keeping more cash available after selling another home
- Avoiding a required monthly principal and interest mortgage payment
For example, someone may sell a home for $900,000 and want to purchase a new home for $700,000.
Instead of using the entire $700,000 in cash, they may be able to use part of the sale proceeds as the down payment and finance the remainder with a reverse mortgage.
That could allow them to keep a larger portion of their money available for retirement, investments, emergencies, or other expenses.
Do You Have a Monthly Mortgage Payment?
A reverse mortgage generally does not require a monthly principal and interest mortgage payment.
That is one of the main reasons people consider a reverse mortgage purchase.
However, the homeowner is still responsible for:
- Property taxes
- Homeowners insurance
- Flood insurance if required
- HOA dues if applicable
- Maintaining the property
- Keeping the home as the principal residence
Those responsibilities do not go away.
Do You Still Own the Home?
Yes.
The borrower owns the home.
The reverse mortgage is simply a loan secured by the property.
The bank does not become the owner of the home.
The title remains in the homeowner’s name.
What Types of Homes Can Be Purchased?
Eligible property types may include certain:
- Single-family homes
- Two-to-four-unit properties
- Condominiums
- Townhomes
- Manufactured homes that meet program requirements
Not every property qualifies.
Condos and manufactured homes can be more complicated because they may need to meet additional requirements.
If you are looking at a specific property, it is better to check eligibility early instead of waiting until you are deep into the transaction.
Can You Buy a New Construction Home?
Possibly.
New construction can work, but the timing and property requirements need to be handled correctly.
The home generally needs to be completed and meet applicable program requirements before closing.
Builder documentation, inspections, appraisal requirements, and occupancy can all matter.
This is one of those transactions where I would want to look at the details early.
Can You Buy a Condo?
Possibly.
Some condos can qualify for reverse mortgage financing.
The condo project may need to meet FHA or lender requirements depending on the program.
Not every condo project is eligible.
If someone is looking at a condo, I would recommend checking the project before getting too far into the purchase.
Can You Use Gift Funds?
Depending on the program and source of funds, certain funds may be allowed.
The borrower must be able to document where the money for the purchase is coming from.
That can include things such as:
- Sale proceeds from another home
- Savings
- Retirement assets
- Certain other eligible funds
The exact rules depend on the program.
What Happens to the Reverse Mortgage Balance Over Time?
Just like with other reverse mortgages, the loan balance generally increases over time.
Because there is usually no required monthly principal and interest payment, interest and applicable fees are added to the loan balance.
The homeowner still owns the property.
The loan typically becomes due when a maturity event occurs, such as when the last borrower sells the home, permanently moves out, or dies.
What Happens If You Sell the Home Later?
You can sell the home at any time.
The reverse mortgage is paid off from the sale proceeds.
Any remaining equity belongs to the homeowner after the loan and normal selling costs are paid.
There is no requirement that you keep the home forever.
What Happens When the Borrower Dies?
When the reverse mortgage becomes due, the heirs may have options.
They may be able to:
- Pay off the reverse mortgage and keep the home
- Refinance the balance
- Sell the home
- Use another available option under the program
The reverse mortgage does not automatically mean the lender gets the house.
Reverse Mortgage Purchase vs Paying Cash
This is where the strategy can become interesting.
If someone has enough money to pay cash for a home, that does not always mean paying cash is the best choice.
For example, someone may sell a home and have $800,000 available.
They want to buy a new home for $600,000.
They could pay the full $600,000 in cash.
Or they may be able to use a reverse mortgage purchase, put down a portion of the purchase price, and keep more of their cash available.
That could leave money available for:
- Emergencies
- Investments
- Retirement income
- Medical expenses
- Travel
- Family needs
- Home improvements
That does not mean the reverse mortgage is automatically better.
It simply creates another option.
Reverse Mortgage Purchase vs Traditional Mortgage
A traditional mortgage and a reverse mortgage purchase can both be used to buy a home, but they work very differently.
With a traditional mortgage, the borrower generally makes monthly principal and interest payments.
With a reverse mortgage purchase, there is generally no required monthly principal and interest mortgage payment.
That can be important for someone who is retired and wants to reduce monthly obligations.
However, the upfront cash requirement for a reverse mortgage purchase is usually much higher than with a traditional mortgage.
That is why the right choice depends on the homeowner’s goals and financial situation.
Who Might Benefit From a Reverse Mortgage Purchase?
A reverse mortgage purchase may be worth looking at if you:
- Are 62 or older
- Want to buy a primary residence
- Have significant cash available from savings or the sale of another home
- Want to avoid a required monthly principal and interest mortgage payment
- Want to keep more cash available instead of using it all to purchase the home
- Plan to stay in the new home for a reasonable period of time
It can also be useful for someone who wants to relocate in retirement but does not want to use all of their available assets to buy the new home.
Who Might Not Be a Good Fit?
A reverse mortgage purchase may not make sense for everyone.
It may be less attractive if:
- You plan to move again very soon
- You are uncomfortable with the loan balance increasing over time
- You want to preserve as much home equity as possible for heirs
- You do not have enough funds available for the required down payment
- A different financing option better meets your goals
The goal should never be to use a reverse mortgage simply because you qualify.
The question is whether it improves your overall financial situation.
Simple Reverse Mortgage Purchase Example
Suppose a homeowner is 70 years old and sells their current home.
They want to purchase a new home for $650,000.
Instead of paying the entire $650,000 in cash, they may be able to contribute part of the purchase price and use a reverse mortgage for the remaining amount.
That allows them to own the new home without a required monthly principal and interest mortgage payment while keeping more of their cash available.
The exact down payment would depend on age, interest rates, program guidelines, and the value of the property.
Can You Use a Reverse Mortgage Purchase to Move to Another State?
Yes, assuming the property and borrower meet the program requirements and the loan is available in that state.
This is one of the more common reasons people consider a reverse mortgage purchase.
Someone may want to move:
- Closer to children or grandchildren
- To a warmer climate
- To a lower-cost area
- To a retirement community
- To a home that is easier to maintain
A reverse mortgage purchase can sometimes make that move easier financially.
What Information Do I Need to See If It Might Work?
You really only need a few basic pieces of information to get started:
- Age of the youngest borrower
- Approximate purchase price
- Amount of cash available for the purchase
- Property type
- State where the property is located
- What you are trying to accomplish
From there, I can help you determine whether a reverse mortgage purchase may be realistic.
Want to See How a Reverse Mortgage Purchase Could Work for You?
If you are considering buying a home and want to see whether a reverse mortgage could help, tell me what you are trying to do.
Maybe you want to downsize.
Maybe you want to move closer to family.
Maybe you want to keep more cash available instead of putting all of it into the new home.
We can look at the numbers and see whether the program makes sense.
Call or text Shawn at (714) 271-8524 or email Info@TheBroker.Finance to discuss your reverse mortgage purchase options.
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This information is for educational purposes only and is not a commitment to lend. Reverse mortgage purchase eligibility, required borrower funds, proceeds, rates, costs, property requirements, and program guidelines vary by borrower, property, lender, and current program rules.