In 2009, I wrote about the Home Equity Conversion Mortgage (HECM) for Purchase loan, which enables borrowers to use reverse mortgage financing to purchase a home.

Prior to writing that post, I hadn’t ever heard about this product. Many months later, it is still relatively obscure. In the year-to-date, an estimated 1,200 HECM-for-Purchase loans have been originated, representing a mere 3% of all reverse mortgage volume. The problem seems to be less that the product is unappealing, and more that people simply don’t know it exists. Realtors fail to mention it to eligible borrowers, who thus fail to consider it as a financing option when purchasing a new home.

Research suggests that if the product was better known, it would be more popular. Namely, surveys have shown that many retirees (aka eligible borrowers) desire to move, either to a different property in the same area or to a new area altogether. Except for the minority of borrowers that is prepared to pay cash for their new homes, all of them represent excellent candidates for obtaining reverse mortgages for purchase.

For example, some borrowers would like to purchase a new home that is more expensive than their existing homes. Other borrowers that want to move into similarly-valued homes still have primary mortgage debt at their current homes, and are not interesting in obtaining a new primary mortgage. Other borrowers have the cash to purchase a new home but would prefer to set some of it aside, and not simply transfer their wealth from one home to another.

By obtaining an HECM for purchase, such borrowers would be required to pay only half (depending on their age) of the cost of the home in cash (aka a down-payment of 50% LTV). While it would be possible to make the same down-payment and obtain a conventional mortgage, this would require them to make monthly payments for as long as they continue to reside in the property. This is something that some borrowers are either unable, or simply unwilling to do. With a reverse mortgage, the need to make payments would be eliminated.

Of course, the downside is the cost. There are hefty upfront fees, and the steady accumulation of interest would gradually erode one’s equity. Depending on the valuation of the home, it might still be a better deal than renting, since it exposes the borrower to profits from home-price appreciation without creating risk (thanks to the required FHA insurance premium) of home-price depreciation.

In short, if you’re eligible for the program and are contemplating “switching” homes, it’s certainly something to consider.

2 Responses to “HECM For Purchase Still Unpopular”

  1. David Gold Says:

    In reality, the HECM for Purchase is a great product but you are correct that the “word” has not gotten out on it as yet. It has only truly been in existance since the final Mortgagee Letter was issued around April, 2009.

    There are criteria that applies to the qualification of a HECM for Purchase that does not apply to a regular HECM and I believe this has caused the low number of closed loans more than most other factors.

  2. Jay Patel Says:

    On the HECM program,do the Purchaser have to have a good credit?

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