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 in CA. The HECM for purchase, or reverse purchase, rolls this into a single transactions.
There are three ways for seniors to buy a new home with a HECM reverse mortgage.
- Paying all-cash for the new home and then obtaining a reverse mortgage. This is the simplest option and the HECM will replace some of the assets liquidated to buy the home.
- Buying with a forward mortgage then repaying with a reverse mortgage. Before the HECM was created, seniors who wanted to buy a new home but could not afford to pay all in cash had to take out a regular mortgage and then repay it with a reverse mortgage. This option has several disadvantages, as the senior must qualify for the regular mortgage and pay closing costs on two loans.
- Buy with a reverse mortgage. This option allows seniors to buy a new home and take out a HECM reverse mortgage at the same time with one set of closing costs. The senior does not need to be a current homeowner, but he or she must have the ability to pay the difference between the sale price and closing costs and the maximum amount they can draw on the loan.