Can You Buy a New Home With a HUD Reverse Mortgage?
- The concept behind a reverse mortgage is that instead of repaying a home loan, the equity in the home repays the loan at a time convenient to you -- namely, when you don't need your home anymore. In a standard reverse mortgage, a bank lends you money based on your home's equity. Interest accrues on the principal and the entire loan is repaid when you die, move or sell the home. If any equity is left, it goes to you or your heirs. A reverse mortgage for purchase works almost the same way, but you make a down payment and the lender gives you a loan for the balance which you do not have to repay until you leave.
- According to the Center for Retirement Research at Boston College, the percentage of older Americans at risk of being unable to maintain their pre-retirement standard of living into their retirement years jumped from 44 percent in 2007 to 51 percent in 2009. With housing costs nearing $2,000 a month in the most expensive places, many seniors need to find a way to lower their monthly costs to sustain their standard of living. At the same time, some seniors want to downsize their homes or move into one-story, handicap-accessible residences. The reverse mortgage for purchase addresses all of these issues. It allows seniors to downsize, reduce their monthly housing cost and buy a home.
- Reverse mortgages, both standard and for purchase, are available only to seniors age 62 and older. In a reverse mortgage for purchase, the borrower must be able to make a 35 percent to 40 percent down payment on the new home. Down payments can come from the sale of an existing residence, savings or any other sources. The mortgage can be taken out as a fixed or adjustable-rate loan. Interest compounds on the principal. The house is sold when you die or move and the loan is repaid from the sale proceeds. If the house has not appreciated enough to repay the loan, mortgage insurance pays the lender the difference. This is a nonrecourse loan -- neither you nor your heirs are personally responsible for repayment. Any equity remaining after loan repayment returns to you or your heirs.
- As with a standard reverse mortgage, the two big benefits to a reverse mortgage for purchase are that it is a payment-free loan during the years you live at home and it is a nonrecourse loan for which you will never be personally responsible. The reverse mortgage for purchase might also allow you to buy a house you would otherwise not be able to because credit, income and assets (other than the required down payment) are not required to qualify.
- The first disadvantage of this type of reverse mortgage is the down payment requirement. Thirty-five to 40 percent is a substantial sum, no matter what the house price if you have never owned a home before. If you have a home you've lived in quite a while, selling it should yield the down payment and provide you with a nest egg as well. Closing costs on reverse mortgages are also high, principally because of the mortgage insurance premium. And if you want to leave a sizable estate to your heirs but your home is your only large asset, a reverse mortgage will conflict with your goal. It is likely that little, if any, equity will remain for heirs after the loan is repaid.