I set out to write today’s post about a clever idea that I had recently conceived: using a reverse mortgage to purchase a home. While reverse mortgages are conventionally used as a last resort by homeowners that want to stay in their respective current homes but lack the means to do so, I figured that such could also be theoretically be used to purchase a new home by retirees that likewise lacked the means to do so.

Alas, a little bit of research revealed that I was not the first to think of such a clever idea. In fact, it turns out borrowers have been utilizing reverse mortgages in this way for over 10 years. Originally, the product of choice was the Fannie Mae Home Keeper for Home Purchase program, which provides modest loans for borrowers that can’t afford an all-cash transaction but want to to avoid the monthly payments associated with a conventional mortgage.

On January 1, 2009, this product became irrelevant, as HUD officially began underwriting Home Equity Conversion Mortgage (HECM) for Purchase loans. Made possible by legislation associated with the economic stimulus, this program exists for the sole purpose of enabling borrowers to fund the purchase of a home using a reverse mortgage. Since I haven’t heard/read otherwise, I’m assuming that the same loan limits apply to this product as apply to vanilla HECMs ($625,500).

There are a couple of special features/limitations, however, that distinguish this from a normal reverse mortgage. First of all, the down-payment for the home must be funded completely with cash. Credit card debt, bridge loans, gifts from relatives (bank accounts are to be scrutinized), and of course the reverse mortgage itself, are all forbidden to be sourced. Second, the size of the reverse mortgage is determined based on the appraised value – not the purchase price – of the home. In this way, borrowers receive a “reward” for purchasing undervalued homes.

Next, there is a provision that prevents borrowers from having to pay a second mortgage insurance premium, if they already have a reverse mortgage outstanding. The rules require the borrower only to pay the difference (if any) between the old and new premiums. Finally, there is an anti-flipping stipulation, which essentially aims to prevent the product from being used for fraudulent or speculative purposes, by auditing mortgages on homes that were sold within 180 days from the previous sale.

On the surface, the HECM for Purchase loan is a great way for retirees to buy a new home at a fraction of the cost, without assuming any new debt. Of course, there’s no such thing as a free lunch, and the program is not without its drawbacks. High upfront costs and comparatively high interest rates limit the prinicipal size and erode one’s equity. In effect, reverse mortgaging a new home is tantamount to renting it. Non-refundable fees/costs are akin to rental payments, and it’s impossible to build equity, since any home-price appreciation will probably be offset by the payment of compound interest. Still, for those that have their eyes set on owning a home – even in their twilight years – the program represents a viable way to do it.

6 Responses to “Reverse Mortgage to Purchase Program”

  1. Housing Prices Weigh on Reverse Mortgages Says:

    […] contradictory ways. On the one hand, its new Reverse Mortgage for Purchase loan (the subject of my last post) is calculated from the appraised value of the home, even if it’s higher than the sale value. […]

  2. Wendy Kimberleyfield Says:

    Adam, I was agressively pursued by Financial Freedom in September 2009 to refinance my existing “jumbo” reverse mortgage with them for a HECM under the new American Recovery and Reinvestment Act, for which I was hesitant to apply. I now regret having not listened to my instincts. The loan officer paid me a visit,was impressed with the property which is located at the very end of the Branford River facing Long Island Sound.She declared the views alone were worth a million dollars. I understand this was an opinion, but it was a factor in my decision to go ahead with the loan process,and the decision was mine alone.When the appraisal came in she called me saying she was “shocked” by the very low evaluation and the “terrible” comparison photographs of other properties. Worth $925,000. at the original closing in May 2008, my property had plummeted to $350,000.! Literally steps to the beach,park, dock, and yacht club, and having sustained yet another year of renovation, the appraiser greatly devalued the location,views,renovations,the home itself, of this desirable property, now worth slightly less than the original loan made with Financial Freedom in 2008. The loan application, of course, was denied – a first for me with any bank!
    I have since found out after research and reading your excellent articles that the government is targeting the appraisal industry, accusing it of lacking “integrity.” Rules were now to be strictly enforced to significantly lower home values previously established.None of this was disclosed to me in the counseling I received prior to proceeding with the loan process. Otherwise, I would never had applied. I also told the loan officer at the time I was not paying closing fees or appraisal fees or I would not apply(It had cost me over $14,000.out of my own savings plus lawyer fees,to close the original 2008 “jumbo”reverse mortgage.) I was guaranteed I would not have to pay any of these fees,not even the appraisal.So I proceeded.
    I am 71,a retired teacher of 40 years service to the state of Connecticut,alone,without family, and challenged with MS on a daily basis.(No sympathy, please.)Left with a $350.appraisal bill I was told previously would not be charged to me, lawyer bills I didn’t have before, a very low appraisal on record for all to access,and daily fear they will take away my home I have lived in for over 30 years. Who could ever have foreseen such a precipitous drop in home values in America! Surely there must be countless elders in my situation. Personally, I consider it a fraudulent land grab by the present administration in Washington, part of the “redistribution of wealth” ideology being forced on us.
    Thank you, Adam, for your consistent communication from the constantly changing mortgage crisis.Your articles are au courant,knowledgeable, and,as a great man once said,”an unending adventure at the edge of uncertainty.”
    Sincerely, Wendy Kimberleyfield
    From beautiful coastal Connecticut on Long Island Sound

  3. Jim criag Says:

    I am interested in knowing more about this reverse mortgage to own a home. I am currently 60 years old and I am renting. Have cash and could be interedted in this approach. Where can I find out more details?


  4. c gamble Says:

    How is the maximum claim amount and principal limit calculated?

    For HECM purchase transactions only, the maximum claim amount will be the least of: 1) the appraised value; 2) sale price; or 3) FHA mortgage limit for a one family residence. The principal limit is determined by multiplying the maximum claim amount by the principal limit factor corresponding to the age of the youngest mortgagor, the expected interest rate and the initial MIP option that the borrower selects

  5. Barbara Johnson Says:

    I would like research done on spouses being kicked out after other spouse dies and huddled rules not allowing widow to purchase on short sale because home is upside down.

  6. Mary dunn Says:

    I would like to refinance my reverse mortgage they are trying to take my homsomebody please help I don’t have money to buy it back

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