What is the HECM for Purchase Program?
A reverse mortgage is a great way for homeowners over the age of 62 to earn a little extra cash before depending on retirement funds. With the Home Equity Conversion Mortgage (HECM) program created by the Department of Housing and Urban Development and guaranteed by the Federal Housing Administration, reverse mortgages are becoming more and more popular by the day. After all, it is the only reverse mortgage program that is guaranteed by the United States government.
What many borrowers don’t know is that the Home Equity Conversion Mortgage program actually consists of three different HECM loan types:
There is the traditional HECM, which operates like any other reverse mortgage loan on the market, that allows homeowners to be paid a portion of their home equity by the lender instead of making monthly mortgage payments.
The program has a HECM loan for refinancing as well. The HECM refinance loan is for homeowners who already have a reverse mortgage, and wish to refinance. This allows them to aim for better rates or increased valuation for their home, resulting in a bigger payout.
Finally, there is the HECM for purchase loan package. Homeowners who opt for a reverse mortgage can use the money they are paid from the loan any way they please. Some put that money towards purchasing a new home. The problem is that both a reverse mortgage and an entirely new home loan are quite costly in tandem.
Also, the one major stipulation of a reverse mortgage is that borrowers must live at the house that the reverse mortgage was originated for -- or else the loan must be paid back in full. This doesn’t mean that they can’t purchase another home, it is just extra red tape to deal with. This is where the HECM for purchase loan comes in.
What Is the HECM for Purchase Loan?
Created in 2009, the HECM for purchase loan program is meant specifically for eligible borrowers who wish to get a reverse mortgage and purchase a new home. Typically, this would require borrowers to get their reverse mortgage, and then funnel the proceeds from from that initial loan to fund the purchase of a new home. The process is notorious for requiring a ton of patience, and even more money.
The HECM for purchase loan bypasses these challenges. It lets borrowers accomplish the same thing, with only one mortgage transaction.
The amount of savings a borrower stands to make by utilizing the HECM for purchase loan over the older two loan process is substantial. It is no secret that reverse mortgages can be expensive, and many home buyers have trouble with typical closing costs of home purchase loans. The two together would definitely be a real nightmare. That’s why the HECM for Purchase loan rolls all of the costs into one single transaction!
How Does the HECM for Purchase Loan Work?
When you use a HECM for purchase loan, you are utilizing the equity in your home to cover up to roughly 70% of your new home’s purchase price. The remaining 30% is usually the buyer’s responsibility to pay. The money can come from the sale of the previous home, a gift, savings, or retirement fund. Once that is settled, the fees associated with the reverse mortgage as well as the home purchase are rolled into the transaction, making it a streamlined process.
The borrowing party receives the title to the new home in their name(s), with the lender maintaining a security interest in it. The awesome part is that with the reverse mortgage in place, no monthly payments have to be made on the new home. Payment on the loan is only meant to be collected after the borrowers sell the home, move to a new property, or pass away.
The amount due to be repaid is the amount borrowed, plus interest. It is important to remember that with a HECM (or any reverse mortgage) the loan balance continues to increase over time, but the balance cannot exceed the value of the home. If there is any remaining equity in the home at the time of repayment, then it is transferred to the remaining borrower, the estate, or an heir.
How to Qualify for a HECM for Purchase Loan
The qualification criteria for the HECM for purchase loan matches the other products in the HECM program. Qualification extends to borrowers who:
Are at least 62 years old.
Own the property outright or have a Substantial amount of equity in it.
Will utilize the home as a primary residence.
Are able to pay the home’s property taxes, insurance premiums, homeowners association dues and any other recurring property costs.
Have no delinquent federal debt.
The only addition specific to this program is that the borrower must be able to cover the down payment on the new residence through the home’s equity and/or available cash. In addition, if there is a difference between the new home price and the proceeds of the loan, that amount must be paid by the borrower using cash reserves, assets, or the sale of the home.
HECM for Purchase Property Requirements
Using the HECM for Purchase loan also means adhering to the property eligibility guidelines set by HUD as well. Eligible properties for HECM finance include:
Single family homes or 2-4 unit homes (where one unit is occupied by the borrower)
HUD approved condominiums
FHA approved manufactured homes
You can’t use a HECM for purchase on any of the following property types:
Cooperative Units
Boarding Houses
Recently constructed homes with no certificate of occupancy
Manufactured homes that don’t conform to Manufactured Home Construction Safety Standards
Bed and breakfast style homes
Benefits of a HECM for Purchase Loan
The greatest benefit for the HECM for purchase loan is merging of what used to require two different loans into one. The amount of time and money saved with that trait alone makes the loan a must see for seniors looking to buy a home.
In addition, purchasing a home with a reverse mortgage means borrowers do not have to expend all of their savings in one go. Before the process existed, seniors would buy homes in all-cash transactions, effectively leaving them without a penny to be found should an emergency arise.
As if that weren’t enough, the buying power of a borrower is increased through the usage of a HECM for purchase loan, so they can actually afford a much better house than they would have using their own savings.
Drawbacks of the HECM for Purchase Loan
Using a HECM for purchase loan means that borrowers will not be building any equity in the new home. Of course, many seniors don’t worry about building equity, but it is still something to consider. While any remaining home equity left at the end of the loan term is supposed to be left for any heirs or remaining borrowers, more often than not, there isn’t any.