Purchasing a home with a ‘reverse’
Many people have been exposed to a reverse mortgage, but using a reverse to purchase a home has probably not crossed their radar. Let’s review a few basics of the reverse mortgage (RM) and thenmove on to purchasing a home using this versatile financial tool.
First, the home must be the borrower’s primary residence and be owner-occupied within 60 days of the loan closing. The minimum age of the youngest borrower must be 62, and HUD requires that the borrower(s) go through third-party counseling to ensure that they are making an informed decision. An RM is also government-insured by FHA, which is the insurance arm of the U.S. Department of Housing & Urban Development. The borrower(s) will not be required to make a principal and interest payment, but is expected to continue making property tax and insurance payments and to maintain the home.
What options are available? HUD offers two types of reversemortgages: one with a fixed interest rate for the life of the loan, and an adjustable-rate product that is tied to the LIBOR (London Inter-Bank Offered Rate) index.
Who is a good candidate? There are two factors that drive the amount of equity you are able to access: the value of the home, and the youngest borrower on title. The value is determined by an FHA appraisal. Your credit also plays a role in determining if you will qualify, and how the RM will be structured. In certain instances a LESA (Life Expectancy Set Aside) is set up and the lender will make the property tax and insurance payments on the borrower’s behalf. Reverse mortgages also require residual income, which is income left over after all the borrower’s expenses are factored in.
What a reverse mortgage does, and does not do, for a senior homeowner. RMs are designed to be long-term loans due to upfront costs. The upfront FHA mortgage insurance requirement is 2 percent of the value of the home, and the mortgage insurance is required for the life of the loan. The loan becomes due when the borrower moves out of, sells, or can no longer occupy the home.
One of the real advantages of having a reverse mortgage is the flexibility it gives the borrower. Living a debt-free life improves the quality of your experience. Many seniors will pay off debt or put aside money for long-term care. You make the decisions on how you want your money to work for you.
How a reversemortgagemay be used in a purchase transaction. If you are considering purchasing a home, whether downsizing or upsizing, the RM may hold the answer you are looking for. In most instances you will approximately double your buying power and have no principal and interest payment. As an example, if you sell your home and net $150,000 and you do not want to make payments, you may pay use the cash for your new home, or you may use the $150,000 as a down payment, do a reverse mortgage for $150,000, and buy a $300,000 home, and you will not make principal and interest payments.
The RM loan application is completed based on your purchase agreement. The seller may pay a portion of your closing costs. Before youwrite a purchase agreement, it would be prudent to sit down with your Realtor and your reverse-mortgage lender to structure your contract. FHA requires the completion of an appraisal, which will inform the seller, buyer, and lender of the home’s value. The reverse loan amount is based on the sale price of your new home or the appraised value, whichever is less. If repairs are needed, they must be completed prior to closing.
Purchasing a home is always an exciting time, and using a reverse mortgage to purchase has some distinct advantages. Sit down with your mortgage specialist and explore the options available to you.
Dirk Gray is a reverse-mortgage specialist with Frost Mortgage. He was approved in 1989 by the New Mexico Real Estate Commission as an accredited instructor. Dirk may be reached at (505) 930-1953 or firstname.lastname@example.org.