Reverse Mortgages to Purchase a Home
On January 1, 2009, Congress made a provision that allowed the HECM Reverse Mortgage to be used to purchase a home for the first time. It took awhile for HUD to publish the guidelines for doing so but I believe my client, Gerry Weaks (not his real name - he's a little shy) was one of the first in the nation to purchase a home with a HECM Reverse Mortgage closing on March 31, 2009.
The process is very similar to buying a home with a regular mortgage. But in many ways, it is easier. This is mainly because qualifying for a Reverse Mortgage is very simple. The personal qualification for a Reverse Mortgage that will be used to purchase a home is the borrower must be at least age 62 and be purchasing a home that they will occupy as their principle residence. One document they sign is guarantying they will occupy the home within 60 days of closing.
In most cases, especially after the easy mortgage qualifying days leading up to 2009, regular mortgage buyers need to qualify based on income, credit scores, debt to income ratios and down payment. Down payment is the only one of these the reverse mortgage borrower needs to qualify on. And this only determines the maximum value of home they can purchase.
How Much Home Can You Qualify For
So how much home can you purchase with a Reverse Mortgage? This depends mainly on your age. At this current writing, a 62 year old could qualify for a little over $300,000 on a home valued at $625,500 (the current FHA maximum). That is about a 50% Loan to Value (LTV). So on a $625,500 home, the borrower would need about a $325,000 down payment. For lower home values you can prorate these numbers or use my calculator for different home values and your own age.
- For someone aged 72, they could qualify for about $375,000 (about a 60% LTV) meaning they'd need about $250,000 down payment.
- An 82 year old would qualify for about $440,000 (about 70% LTV) needing a down payment of $185,000.
- A 92 year old would qualify for about $500,000 (about 80% LTV) needing a down payment of $125,000.
By the way, all these numbers showing the amount someone would qualify for would be about the same if you already owned your home and wanted a reverse mortgage against your existing equity.
If the home were purchased for more than $625,500, then the amount above $625,500 would need to be added to the down payment. So in the case of the 92 year old, on a home valued at $725,500, they would need to bring the $125,000 plus the $100,000 excess for a total of $225,000.
From these numbers you can see another difference between a regular mortgage and a reverse mortgage. Most regular mortgages would currently require a LTV in the 80% neighborhood (with a number of exceptions). As you see above, you'd need to be a 92 year old to fall in the 80% LTV guideline. So a younger borrower would need more of a down payment than if they got a regular mortgage.
The Value of Using a Reverse Mortgage to Buy a Home
What, then, is the value of using a reverse mortgage to buy a home. The two BIG reasons I can think of is
- No qualifying
- No monthly payments.
Procedures for Using a HECM Reverse Mortgage to Buy a Home
You may start looking for a home at any time but before a lender may take an application, you need to do the independent third party HECM counseling. You need to specify to the counselor that this is for a purchase. They have a slightly different agenda.
Choosing a Reverse Mortgage Lender
In choosing a reverse mortgage originator, I would be looking for a number of qualifications that I wouldn't have thought necessary for a normal 'refi' reverse mortgage.
- It would help if the originator has already originated a HECM purchase.
- That would be difficult in early 2009 so I would hope to find a reverse mortgage originator who has previous experience in the mortgage industry having originated a number of purchase loans.
- I would hope to find an originator that is with a reverse mortgage company that has already completed a HECM purchase. Again, this will be an issue in early 2009.
- Lacking all this, I would insist on using a reverse mortgage company that has people in the processing department that have purchase experience, at least with regular mortgages.
This is going to be difficult for awhile. In fact, my guess is it may be more than a year before more than half the reverse mortgage lenders do a HECM purchase. Many originators may never do a HECM purchase. In our case, my processor, processing management, and myself had previous purchase experience. This helped us think ahead and avoid problems that could have caused us to 'break contract' (not making the closing date agreed on in the purchase contract). In our specific purchase, the contract was written on March 1, signed by all parties on March 2 and directed closing to be March 31st, which we made.
There are many reverse mortgage companies that have difficulty closing a non-purchase reverse mortgage in 30 days. For this reason, I'd suggest the purchase contract be written for a longer period, if at all possible.
Your Real Estate Agent
It isn't critical your Real Estate Agent knows all about reverse mortgages. My recommendation is they be well experienced. There are enough new things involved, you don't need to add one more. Besides, the experienced Real Estate Agent can help you and the 'purchase challenged' Reverse Mortgage lender think ahead. (The Realtor for Gerry was a gem named Dave Fahrner who covers Sonoma County. I'm physically in Napa County. A trusted realtor for Napa County is Bob Wallin. Bob can answer general Real Estate questions by phone or appointment. He is especially knowledgeable with 1031 exchanges and the Homeowner's Exclusion with their tax implications. Bob offers special Rewards and rebates to his clients. The Real Estate Agent should talk to your lender to make sure they understand details that may be different to what they are used to when doing FHA loans. They may also refer to the HUD Mortgagee Letter 2009-11 (This is an MS Word document) which spells out the specific requirements for the HECM for Purchase.
Here are some items Real Estate Agents may find different or not be aware of:
- Not all properties that can normally receive a mortgage are eligible. (For instance, but not limited to, Manufactured Homes).
- FHA prohibits the use of loan discount points, interest rate buy downs, closing cost assistance, builder incentives, gifts or personal property given by the seller or any other party. Caution here because many of these items are typically allowed for FHA 'forward' mortgages.
- Any repairs required to ensure the property is in a physical condition compliant with FHA guidelines must be performed before closing and the seller must pay 100% of the repair costs.
- The borrower MUST occupy the property within 60 days of closing. The borrower may not agree to rent back/leaseback the property to the property seller.
- There may be a 3 day rescission period prior to funding.
Some of these items were my lender's interpretation of the Mortgagee Letter. There may be some slight differences with your lender.
Documents You Need to Qualify
This documents needed is the same as for a refinance Reverse Mortgage with one addition.
The lender will want two months asset statements showing where the down payment is coming from. It can't be borrowed. If your money is sitting in a bank, a copy of your last two months bank statements will suffice. If your funds are split in different institutions, you will need statements from enough to total your expected down payment and closing costs. It is best to show more than is required in case there are some changes at the last minute. This saves chasing down more documents at the last minute. You are not required to take the money from the statement you provide. For instance, if you have your down payment spread among 5 institutions but have one IRA that has more than enough funds for the entire transaction, you may provide the IRA statement but then draw the funds from the five institutions when the time comes to provide the funds to escrow. Since the transaction will likely take 30 days or more, you will need to provide the most current statement(s) after it you receive them.
Remember, in a regular mortgage that borrowers need to qualify for a mortgage in a lot of different ways. For this reason, lenders are set up to take an application at any time and pre-qualify or pre-approve you prior to you choosing a home. (Pre-approval is usually a higher level and usually means the loan and all the qualifying paperwork have been submitted to underwriting and has been approved subject to the property meeting all qualifications. They will then usually issue a letter to this effect which you can give to your Real Estate Agent. This helps in the home buying process by the agent being able to tell the seller the buyer has already qualified for the mortgage.
Again, remember, reverse mortgage borrowers have virtually no qualifying to go through. They just need to prove their age. Now, with a purchase, they also need to prove they already have the down payment needed. So, typically, a reverse mortgage lender doesn't do anything until a property is chosen. I've recommended to my company that they come up with a process to go through a pre-approval process with an underwriter so an official letter can be issued. Until reverse mortgage lenders begin doing this, it would be helpful for the reverse mortgage originator to have a discussion with the seller's agent to describe the lack of qualifying needed.
Once you are ready to move forward with the application, most lenders will take your information verbally and enter it into their Reverse Mortgage computer program. They will ask you to sit down with them to sign the foot tall stack of papers. (OK, maybe not a foot but perhaps an inch.)
From here you are mostly coasting until the purchase is complete. My experience after hundreds of 'refi' reverse mortgages is we complete the loan over 90% of the time. Most of the time I had a clue right away (and shared it with the homeowner at our initial meeting). I don't have a 'success rate' for regular mortgages but I know they 'fall out' more frequently due to credit issues, income issues, debt to income issues, losing a job at the last minute and property issues. The property issue is about the only thing that remains in the reverse mortgage and you know fairly quickly what you are dealing with. And if it is an issue, maybe you don't want to buy it.
If all is running smoothly, about a week before your purchase is due to be complete, you will be asked to sit down with a notary to sign another big stack of papers. All but a couple are the same as you would sign if you were doing a reverse mortgage for a home you already owned. The purchase portion isn't very difficult. It is just different for this industry.
Once the loan has funded and the escrow has closed, you are all done. Move in and enjoy your new home.