Purchase

Reverse Mortgage Purchase (H4P)

A reverse mortgage purchase is a loan is used to acquire a property and is also known as a HECM for purchase (abbreviated H4P).

HECM stands for Home Equity Conversion Mortgage and is the FHA-insured version of the product. The idea behind an H4P is that you are be able to borrow a portion of the purchase price while not adding a monthly principal or interest payment. The home must become your primary residence.

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Who Should Consider Using a HECM for Purchase Loan?

We are of the opinion that a reverse mortgage purchase loan is an appropriate financial tool for a wide variety of older Americans who can afford to put roughly 50-60% down. The first category of prospective borrower is one who may be looking at a conventional mortgage to finance the purchase. This can include borrowers who:

Have limited cash to purchase the home and taking on a conventional loan would not be good for their monthly cash flow.
Don’t qualify for a conventional loan due to debt-to-income ratios.
Have credit issues that aren’t acceptable to conventional mortgage lenders, but may be okay with reverse mortgage lenders.

The second category of customer is one who is considering buying with all cash. It could be that the cash needed would wipe them out, which would not be a prudent financial decision. Does it make sense to buy a home outright, rendering those dollars relatively illiquid? Or would it be wiser to finance roughly half of the purchase price and keep the remaining dollars in semi-liquid or liquid financial vehicles that match your risk tolerance? We see all too often borrowers who spend their savings and then realize they don’t have much borrowing power on a relatively small, fixed income. Especially if they are single or widowed at that time.

How Do I Know If I Qualify?

To be eligible for a reverse mortgage purchase, you must be 62 years old at the time of closing. A couple can be eligible when one spouse is at least 62. The credit and income qualifications can be found here. If you are attempting to buy your next home before selling your existing one, you’ll have to qualify to carry both.

How Much Do I Have To Put Down?

We are unable to publish the table of downpayment percentages, because that changes every week with long term interest rates, so you will have to reach out for a proposal, even if you don’t have a property in mind. HUD/FHA can also change the table at anytime with a formal announcement.

The downpayment is roughly 50-60% of the purchase price, so anyone looking to put less than that down would be better suited with another mortgage product. The older the person is, the more they can borrow. If married, we go by the younger age, due to that person’s longer life expectancy.

What Kind of Properties Are Eligible?

Acceptable property types include:

1-4 unit homes
Townhomes
Condos (must be FHA approved)
Manufactured homes (must meet HUD’s guidelines)

The property types that are ineligible include:

Co-op units
Condos that aren’t FHA approved
Manufactured homes on leased land
Unique homes (berm, geodesic, Indian tribal land, log homes without similar comps)

Regarding new construction, you can buy a home from a builder using a reverse mortgage. Typically those are called spec homes, and you just have to put down a sizable earnest money deposit to customize the finishes to your liking. If you are looking to buy a lot and hire your own builder, you would need to do that with a construction loan. Upon completion of the property, you can take out a reverse mortgage to pay off the construction loan (be cognizant of the amount of money you borrow to make sure we can pay the loan off).

No matter the type of property you are looking to buy with a reverse mortgage purchase loan, it has to meet FHA minimum property standards before you can close the loan. The appraiser will cite any repair issues and they have to be corrected prior to closing, typically by the seller. Given this requirement, it’s difficult to purchase a home as-is that needs to be rehabilitated.

Homes that have been bought and then sold to you in the last three months are not eligible for an FHA loan. When the time period is three to six months, the increase in the sales price cannot exceed 100%. There are exceptions to these rules, so reach out to us if you have a scenario in mind.

Where Can The Down Payment Funds Come From?

The most common way for someone to use a reverse mortgage purchase loan is to sell their previous residence and use the proceeds as the down payment for the new home. The trick is getting the timing right with the previous sale versus the new purchase, so you aren’t homeless for a period of time. You can do a simultaneous close if you are comfortable with the risk involved.

If you are going to use your own assets, keep in mind that we will need 60 days of complete bank statements showing the funds in the account for that period of time, at a minimum. If there are any large deposits in those 60 days, we’ll need to document where they came from. Gift funds from friends and family are perfectly acceptable, but we’ll need to document them, just like we would your own funds. Part of this requirement is to make sure the funds aren’t borrowed and part of it is to meet federal anti-money laundering regulations.

What Are The Closing Costs?

The two largest closing costs are the upfront FHA mortgage insurance premium and the origination fee. The remaining fees can vary greatly due to differences between states, contract negotiations, property specific items, etc. It’s best to contact us for a detailed estimate if you are getting ready to make an offer on a property.

One important thing to keep in mind with HECM for purchase loans is that HUD doesn’t allow seller concessions. The seller can only pay the closing costs that are typically seller paid in the county in which you are purchasing. That can vary greatly, depending on where you are buying. It’s best to negotiate on purchase price and not on any kind of seller concession. You can’t roll furniture or a golf membership into the purchase price.

What Are The Next Steps?

Depending on the state of the market, you might need to focus on selling your existing home before looking into acquiring your next one. There are time periods where homes sell immediately and time periods when they take a year to sell. It also depends on where you live. We’ll focus on the steps you take once you are far along in the process and expect an offer soon.

Reach out for a proposal to see how much home you can buy based on what you will likely net from the sale of your home. If you don’t want to spend it all, or have a particular purchase price in mind, you can let us know that then.
If the terms are acceptable to you, get prequalified for the loan. That includes documenting your income, assets, and allowing us to pull your credit.
Complete the mandatory reverse mortgage counseling on the telephone with a HUD-approved counselor.
Figure out what property you want to buy and how much you are willing to offer. Assuming you are prequalified, we’ll give you a prequalification letter, so you can make an offer on that specific property.
Once under contract, we go through the typical reverse mortgage process and need approximately 30 days to do so (we can rush in certain circumstances).

HECM for Purchase Down Payment Calculator

State

Age of Youngest Spouse

Purchase Price $

Down Payment Required

Disclaimer: One borrower must be 62 years of age or older at the time of closing. Credit and income qualification required. Weekly rates changes will impact the calculation. Not all states available. The calculator is meant to be an estimate, so for more specific numbers, please submit a Request An Estimate form. Title charges are estimated, and there could be additional costs due at closing, not limited to; homeowner’s insurance, HOA dues, property taxes, state transfer taxes, a property inspection, & a survey.

The terms are based on current market conditions and your financial situation.

Our expert loan officers are here to assist you with any questions you may have about your unique situation.