How to Buy a House With a Reverse Mortgage

If you’re a homeowner who’s 62 or older, you may be able to tap into the equity in your home with a reverse mortgage. This financing option lets you borrow against your equity at a competitive rate and doesn’t require repayment during your lifetime as long as you keep up with property taxes and other obligations. 

The government also offers a particular type of reverse mortgage called a Home Equity Conversion Mortgage (HECM) for Purchase for seniors who wish to buy a new home. This program, started by the Department of Housing and Urban Development (HUD) in 2009, is one financing option for buying a house later in life. 

Whether you’re looking to downsize, move closer to family, or pack your bags for a warmer climate, here is more on how this reverse mortgage for purchase program works and its pros and cons.

What is a reverse mortgage for purchase?

If you’d like to use a reverse mortgage for purchase, a HECM for Purchase loan could help. This government-insured loan allows you to purchase a new home without having to make mortgage payments. 

You’ll still need to maintain the home and pay for property taxes and homeowners insurance. If you fall behind on any of these obligations, the lender could pursue foreclosure on your home. 

You can use an HECM for Purchase to pay for up to about half of your new home. It can have a competitive interest rate, and it may be more accessible for retired seniors than a traditional mortgage. However, this loan still comes with closing costs and requires you to make a substantial down payment. 

Here’s a closer look at the details:

Eligibility requirements

To qualify for a HECM for Purchase loan, you must meet the following requirements: 

• Be at least 62 years old 
• Own the property outright or have substantial equity 
• Purchase a home that you’ll use as your primary residence within 60 days 
• Not hold any delinquent federal debt 
• Meet financial requirements for income, assets, monthly living expenses, and credit history 

You’ll also need to use the HECM for Purchase loan to buy an eligible property type that meets the Federal Housing Administration’s (FHA) property standards and flood requirements. Eligible properties include:

• Single-family homes
• Two- to four-unit homes 
• HUD-approved condo projects 
• Individual condo units 
• Manufactured homes 

Fees and costs 

A HECM for Purchase loan doesn’t require you to make monthly payments on the mortgage, but you are responsible for other costs, such as property taxes, insurance, and homeowner’s association fees.

A down payment is also required, which may amount to between 45% and 62% of the purchase price. Plus, you’ll be charged an initial mortgage insurance premium (MIP) of 2% at closing. 

The HECM for Purchase loan will also come with other fees, but you can generally use the proceeds of the loan to pay for them rather than having to pay out of your pocket. These fees include: 

• Annual MIP of 0.5% of your outstanding mortgage balance 
• Third-party charges, such as fees for an appraisal, title search, and credit check 
• Monthly servicing fee of $30 to $35 

Repayment terms 

The HECM for Purchase loan is a type of reverse mortgage, so it doesn’t require monthly payments while you’re living in the home. The loan balance will only become due after the owners sell the house, leave it for over a year, or pass away. 

In the latter event, the debt will go to the estate. Any children can sell the home to pay off the HECM for Purchase or pay it back themselves to hold onto the property. Since the HECM for Purchase is a non-recourse loan, neither the borrower nor their kids will have to pay back more than the property is worth. 

If you’re the borrower, you’ll still have some monthly payment obligations, such as property taxes, homeowners insurance, homeowner’s association fees, and maintenance costs. 

Tax implications 

The money you get from a reverse mortgage for purchase is considered a loan, rather than income, so it’s not taxable. 

You may be able to claim a tax deduction on your loan’s interest, but only if you’ve been paying it. You’re not required to pay back your reverse mortgage’s principal balance or interest charges as long as you continue to live in the home, pay your property taxes, and meet other requirements. 

Pros and cons of using a reverse mortgage to buy a home 

Using a reverse mortgage to buy a home has pros and cons. Consider these advantages and potential downsides before you borrow: 

Pros

• May give you more purchasing power

  With a HECM Loan for Purchase on top of any savings or proceeds from selling your current home, you may have more cash to purchase your next home. 

• Doesn’t require monthly mortgage payments

• As a reverse mortgage, this loan doesn’t require you to pay back the balance or interest charges during your lifetime as long as you live in the home and meet other obligations.

• Helps you avoid drawing from your savings

  Since the HECM for Purchase can cover up to 50% or so of your home purchase, you may be able to avoid borrowing from your 401(k), IRA, or other savings or investment account.

Cons

• Only available if you’re 62 or older

  You’ll need to meet this age requirement to borrow an HECM for Purchase.

• Charges an upfront mortgage premium and annual MIP of 0.5%

  You’ll need to pay about 2% of your loan at closing, as well as make a large down payment.

• Means you won’t build equity

  While a traditional mortgage helps you build equity, a reverse mortgage drains it away. If you have kids, they’ll have to pay back the debt to keep the home.

Is a reverse mortgage for purchase my best option? 

A reverse mortgage for purchase has several advantages, but it’s not the best financing option for every borrower. Asking yourself the following questions can help you decide whether a HECM for Purchase is right for you: 

• Do you plan to use your next home as your principal residence? The HECM for Purchase program requires you to live in the home you purchase within 60 days. If you leave or sell the home, your reverse mortgage will become due. 
• Can you afford a down payment of 45% to 62%? The HECM for Purchase loan won’t cover the full cost of your new house. You’ll need to make a hefty down payment, as well as pay any remaining balance. 
• Do you have the financial means to pay monthly property taxes and other obligations? You must meet financial requirements to borrow the loan and pay these monthly bills while you live in your new home. 
• Are you planning to leave your home as an inheritance for your heirs? If you want to build equity in your home, a traditional mortgage may be the better option. With a reverse mortgage, your heirs will have to pay back the loan if they want to keep the property. 
• Have you explored alternative financing options? Consider alternatives, such as a traditional mortgage or borrowing from your savings, to see which would be the most cost-effective financing approach for you. 

If you’re looking to relocate, downsize, or upgrade to a new home, an HECM for Purchase can help you finance the new property without paying monthly mortgage payments. 

This financing option may allow you to keep more of your retirement savings while increasing your monthly cash flow. However, it also means you won’t be building equity in your new home or able to leave it to your kids in the future without debt attached. 

Because the HECM program is complicated, HUD requires prospective borrowers to have an HECM counselor before applying. With your counselor, you’ll talk about eligibility requirements, financial expectations, repayment obligations, and alternative financing options. 

According to HUD, this counseling session will enable you to make an informed decision about whether a reverse mortgage for purchase is right for you. 

The best candidates for a HECM for purchase are seniors who are looking to move into their forever home and don’t care about leaving the home to their heirs. It’s also important to have the financial means to comfortably cover the ongoing costs of maintaining the home.

Chloe Moore

CFP®

Alternatives to a reverse mortgage to buy a house

When deciding to buy a new home, it’s critical to consider all available options. Compare reverse mortgages with other financial products, such as traditional mortgages, retirement savings, selling your current home, or a home equity line of credit (HELOC).

Traditional mortgage 

Unlike a reverse mortgage for purchase, a traditional mortgage requires you to make regular payments toward the principal and interest. You’ll need to prove your income and creditworthiness, but it could offer lower interest rates and cost much less over time. However, you risk foreclosure if you fail to make your payments.

Retirement savings

Using retirement savings can provide liquid funds for your home purchase, but it also risks depleting your nest egg. While you avoid the interest costs associated with a mortgage, it’s critical to assess how the home purchase will affect your long-term retirement plans.

Sell your current home

By selling your current home, you may be able to purchase a new house outright, avoiding the need for a loan. This strategy works well if your current home has appreciated considerably. The drawback is that it might leave you with reduced assets if real estate markets decline.

HELOC

A home equity line of credit allows you to borrow against your home’s equity while maintaining ownership. Unlike a reverse mortgage, a HELOC requires monthly payments, but it also often carries a lower interest rate. Use this option with caution; failure to repay can lead to loss of your home.

Ask the expert

Chloe Moore

CFP®

Before deciding on a HECM for purchase, consider how this option would fit into your retirement plan and whether you’re an ideal candidate. If you have significant equity in your home or own it outright, don’t want to move, and would like to tap into that equity to supplement your retirement income, a traditional mortgage or HELOC could be a better option.

FAQ 

What are the age requirements for a reverse mortgage for purchase?

You must be at least 62 years old to qualify for a reverse mortgage. This age requirement applies to you and your spouse. The reverse mortgage for purchase program is a viable financial strategy, but it’s designed for seniors who want to relocate or downgrade to a smaller home.

Can I buy any type of property with a reverse mortgage for purchase?

The Federal Housing Authority stipulates that a reverse mortgage for purchase can only be used for a single-family home or a two-to-four-unit home where the borrower occupies one unit. It also covers FHA-approved condominiums and manufactured homes. It excludes cooperative apartments and most mobile homes.

How does a reverse mortgage for purchase affect my heirs and estate?

A reverse mortgage can affect your heirs and estate because the loan is repayable after your death. Upon your passing, the loan becomes due. Your heirs can sell the property to repay the mortgage, or they may choose to keep the house and repay the debt out of other resources.

What are the upfront costs of taking out a reverse mortgage for purchase?

Upfront costs of a reverse mortgage include an origination fee, an initial mortgage insurance premium, and other closing costs. Much like a traditional loan, these expenses can vary depending on the lender and the specifics of the contract. It’s crucial to break down and understand these costs before deciding.

How long does the process to secure a reverse mortgage for purchase take?

The typical process of securing a reverse mortgage can take between 30 and 45 days. This timeline includes counseling, application, appraisal, underwriting, and closing. The time frame may vary according to individual circumstances and the intricacies of the specific transaction.

Can I still qualify for a reverse mortgage for purchase if I have a mortgage?

Yes, you could qualify for a reverse mortgage if you already have a mortgage. You must pay off any outstanding mortgage with the proceeds from the reverse mortgage or other funds. If applicable, part of your loan obligation is maintaining the home and staying current on property taxes, homeowners insurance, and homeowners association fees.

Are there income requirements for obtaining a reverse mortgage for purchase?

The lender will conduct a financial assessment to ensure you can handle the ongoing costs associated with the property, but no specific income thresholds exist to obtain a reverse mortgage for purchase. The financial assessment will consider your income, assets, credit history, and monthly living expenses.