HECM for purchase
What is HECM for Purchase?
A Home Equity Conversion Mortgage (HECM) for Purchase is a reverse mortgage that allows seniors, age 62 or older, to purchase a new principal residence using loan proceeds from the reverse mortgage.
HECM for Purchase has a Flexible repayment feature — The borrower can choose to repay as much or as little as they like each month, or make no monthly principal and interest payments. The flexible repayment feature makes it easier for a buyer to afford the home they really want, preserve more savings and retirement assets, and improve cash flow. As with any mortgage, the borrower must keep current with property-related taxes, insurance and maintenance as part of their ongoing loan obligations. Repayment is generally required once they sell the home, pass away, move out or fail to meet their loan obligations.
- Required down payment between approximately 45% and 62% of the purchase price, depending on buyer’s age or Eligible Non-Borrowing Spouse’s age, if applicable. (This range assumes closing costs will be financed.) The rest of the funds for purchase come from the HECM loan. This allows the buyers to keep more assets to use as they wish, as compared to paying all cash, while still having the flexibility of no required monthly mortgage payments.
Eligible properties for HECM for Purchase:
Single-family homes; FHA-approved condominiums; townhouses or Planned Unit Developments (PUDs); two- to four-family homes that are owner-occupied; and manufactured homes meeting HUD guidelines. • Just like the traditional HECM the HECM for Purchase is a Federal Housing Administration (FHA)-insured* program, HECM for Purchase has a non-recourse feature, which means the borrower can never owe more than the home is worth when the loan is repaid. The home is the only source of repayment regardless of the loan balance at maturity.
Who is best suited to utilize HECM for Purchase?
HECM for Purchase is best for those who are age 62+ and:
- Are ready to downsize, upsize, move closer to family, move to a low-maintenance community, a more convenient neighborhood, or finally buy their “dream house”—and don’t want to take on a required monthly mortgage payment.
- They live on a fixed income; are concerned about being able to afford a new home via a cash purchase or traditional financing; and/or want to avoid tapping into their retirement nest egg. • Their current home no longer fits their lifestyle — For example, the washer and dryer are down in the basement; the yard is too big to take care of; they need or prefer a one-floor living situation. They want a new home that’s a better fit for their physical needs.
- They want to increase their purchasing power to buy the home they really want, with the amenities they need or desire.
- They want to preserve some of proceeds from the sale of their home for a cash reserve or other retirement savings.
HECM for Purchase Buyer Q & A
- Do they typically stick to one story homes? Yes, according to the National Association of Home Builders (NAHB) 2016 survey of Housing Preferences of the Boomer Generation, 75% of Boomers and 88% of seniors prefer a single-story home.
- What accessibility features do they want? They want a home that meets their physical needs, e.g., one-level properties, ramps, wider doorways, universal design features, etc.
- Do they want to be close to amenities, public transport, etc.? Yes, they typically want to be closer to retail space, a park area, walking/jogging trails, medical care, and public transportation.
- Where can I find these buyers? Most home buyers are not aware of the HECM for Purchase financing option. There’s a great opportunity for real estate agents to educate clients and potential clients age 62+ on the HECM for Purchase financing option—a strategy that could potentially lead to selling more or higher-priced homes.
HECM for Purchase Quick Reference Guide
What are the Ongoing Obligations of a HECM Borrower?
Making monthly principal and interest payments is NOT an ongoing obligation for the homeowner. However, failure to keep up with the required homeowner obligations could cause a homeowner to be in default on the mortgage. The critical borrower obligations and mortgage requirements include:
- Occupy the home as their primary residence • Keep the property in good repair
- Payment of property taxes
- Payment of homeowner insurance
- Payment of other property charges including, but not limited to flood insurance, HOA dues, condo dues, etc.
What is a HECM Occupancy Certification?
The Home Equity Conversion Mortgage is ONLY offered for primary residences. Therefore, the homeowners will be required to certify their occupancy of the property (via mail) one year after closing and every year thereafter. This is not an inspection of the property, and the homeowner should not feel that this is a violation of their privacy. The homeowner simply returns the signed certification indicating they still meet the requirements of the program. If the letter is not returned, the servicer may be required to follow up with phone calls and a visit to the property.
What Properties are Eligible for HECMs?
The following is a list of properties that are generally eligible for HECM financing:
- Single Family Residence
- 2-4 Unit properties
- Manufactured Homes titled and taxed as real property under local law
- Modular Homes
- Planned Unit Developments
- Approved Condominiums 7 A Toolkit for Real Estate Agents © 2018 National Reverse Mortgage Lenders Association The following is a partial list of homes that may not be eligible – mobile homes, cooperative units, commercial properties, working farms, investment properties, second homes, and properties on reservations.
How are Borrower Principal Limits Calculated?
The initial Principal Limit (PL) is defined as the maximum amount that is available to a HECM borrower at the time of closing. Keep in mind, access to the full PL may be restricted at closing (fixed rate) or in the first year of the loan (adjustable rate). The PL is calculated using tables, provided by HUD, that consider two factors – the age of the youngest borrower (or Eligible Non-Borrowing Spouse if applicable) and the expected average mortgage interest rate (Expected Rate). Higher ages generally result in higher principal limits. Higher expected rates generally result in lower principal limits. For example, a married couple, age 76 and 75, with an expected rate that rounds to 5.00% will qualify for 47.5% of their home’s value up to $679,650.
Older Americans are buying homes. In fact, 25% of all home buyers are age 60 or older, according to the National Association of Realtors®. Most of them (68% of those age 62 to 70 and 58% of those age 71+) finance the purchase of their home. But less than one percent of home buyers age 62+ are using the HECM for Purchase option, even though it may be a more suitable solution. When a buyer uses HECM for Purchase, they have more available funds to afford the home they really want in the location they desire, and they’re able to maintain greater financial control.