While seniors have used reverse mortgages for years to turn the equity in their home into cash with no monthly payments, fairly recent legislation enacted by the U.S. Federal Housing Administration now allows seniors to get a reverse mortgage on a property they do not own yet. A reverse purchase loan is an FHA-insured home loan.
The Home Equity Conversion Mortgage (HECM) for Purchase was made four years ago by Congress to streamline the home buying process and cut costs. In the past, seniors had to buy a new home, pay closing costs, then take out a reverse mortgage on the new home with additional closing costs. The HECM for purchase, or reverse purchase, rolls this into a single transaction.
A reverse purchase loan allows borrowers 62 and older to buy a new primary home using the loan proceeds from a reverse mortgage. This program allows seniors to buy a new home and get a reverse mortgage in the same transaction, or allow senior homeowners to relocate to a new area or downsize to a new home.
The program allows using a reverse mortgage to buy a single-family home, condo or a small, multi-family residence. Most borrowers receive a fixed-rate, lump sum loan, which goes toward the purchase of the new home; although some choose to leave some proceeds in a line of credit for future use.
An HECM for Purchase does require a down payment. With a conventional reverse mortgage, the loan proceeds are based on the home's equity. With a new reverse purchase, there is no equity, because the home is not owned yet. There must be equity to cover accrued interest on the loan; however, so an HECM for Purchase usually requires paying around 50% of the home's sale price in cash.
This down payment may be paid from savings, the sale of a first home, or a gift.
Regardless of how long the borrower stays in the home or what happens to the property's value, the borrower makes a single, one-time investment in the form of this down payment toward the purchase.