Reverse Mortgage Eligibility

  • All reverse mortgage borrowers must be 62 and older
  • Must own property and occupy as primary residence
  • Participate in an information counseling session
  • Must have sufficient equity in the property
  • Property must meet FHA property standards
  • Must maintain home with needed repairs, property taxes and insurance

Loan Amount Based On

  • Age of youngest borrower
  • Current interest rate
  • Lesser of appraised value or the FHA insurance limit
  • An Image Slideshow - Reverse Mortgage Educator
  • An Image Slideshow - Reverse Mortgage Educator
  • An Image Slideshow - Reverse Mortgage Educator

Purchase Reverse Mortgage

The idea of a “purchase reverse mortgage” was not initially part of HUD’s plan for the reverse mortgage program. After all, the formal name for the program was Home Equity Conversion Mortgage (HECM), meaning the intention was to take the existing equity in someone’s current home and convert it to usable cash, without having to make monthly payments. Therefore, for years the only option for a reverse mortgage was a refinance.

After much industry discussion and requests from borrowers, the FHA finally released Mortgagee Letter 2008-33 in October 2008, authorizing the use of a HECM for purchases. The new program took effect January 1, 2009. A main purpose for this option was to assist seniors who wanted to remain independent, but for whom their current residence was inadequate.

For example, a couple may live in a large, 2-story home that needs repairs. The stairs to the second story now represent an obstacle, and they don't want or need a place that big any more. However, they no longer have enough income to qualify for a regular purchase mortgage, though they anticipate getting enough from the sale of the home for good sized down payment on a smaller home. What’s more, even if they were to somehow qualify for a regular mortgage, they foresee income declining down the line, and/or medical or other expenses increasing, and the money for mortgage payments could be well used elsewhere.

Without a HECM for purchase program, this couple would be stuck. At the very least they would be faced with the costs of a regular mortgage for purchase, then turn around and face the costs of a reverse mortgage to refinance and eliminate the mortgage payments. Now they can simply purchase directly with a reverse mortgage.

How does it work? You should first enlist the help of a qualified reverse mortgage loan officer, who can help you identify how much of a purchase you can afford, and the kind of property that will work. For example, if you are thinking about buying a condo, you need to know that a reverse mortgage will only work with FHA approved condo projects, and most condo projects are not FHA approved. There are ways of locating the approved projects, it just takes some extra time.

As to how much of a purchase you can afford, the amount of down payment you will need to bring will be the same as the amount of equity you would need to have in a home if you were doing a refinance. Roughly speaking, if the age of the youngest borrower is 62, you will need to bring about 38% of the price as down payment, plus the costs of the loan. If the age of the youngest borrower is 72, you will need to bring about 32.3%, and if the age of the youngest borrower is 82, you will need to bring about 27%. A purchase reverse mortgage will typically mean getting the Fixed Standard HECM option, because you need the most money possible in a lump sum to buy the home.

Your down payment can be from the sale of your current home or from other sources, as long as it’s not borrowed money. You can keep your current home, or other homes, as rental property, as long as your income is sufficient to cover the expenses of all the homes. The underwriter will want to see that all mortgage payments, property taxes, HOA dues, homeowner’s insurance, etc., will not amount to more than about 45% of your income.

Remember you can only do this with a home that will be your new primary residence, occupying it at least 50% of the year. The lender will likely send someone to check on occupancy shortly after the loan has closed, to make sure you are actually living there. If any repairs need to be made prior to occupancy, you should notify the lender ahead of time.

The HECM for purchase has become one of the best features of the HECM program. Many thousands of seniors have benefitted from being able to downsize or move to be closer to relatives and still have their own home with no monthly payments.

 
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