Reverse mortgage enables home purchase with lower down payment

» “Because [my client] was living on a fixed income, she contacted me hoping to learn of very affordable mortgage options for the gap between her available down payment funds and her likely purchase price in the $700,000 or more range. After learning more

Mortgage broker: John Holmgren, Holmgren & Associates.

Property type: Single-family home in Santa Rosa.

Property value: $710,000.

Loan: FHA HECM adjustable rate reverse mortgage; $291,810; initial rate 7.76%.

Backstory: My client, age 71, first approached me in the fall of 2022. At that time she owned a condo in Palo Alto and wished to move to a single family detached home.

Knowing that she would not realize enough funds from the sale of her condo to be able to buy a home in the Palo Alto area she decided to look for homes in the Santa Rosa area. After some looking at property she realized that her projected net sale proceeds of approximately $550,000 would not be enough to enable her to pay cash for a suitable replacement home.

Because she was living on a fixed income, she contacted me hoping to learn of very affordable mortgage options for the gap between her available down payment funds and her likely purchase price in the $700,000 or more range.

After learning more about her situation, I suggested that she consider using a reverse mortgage for the purchase of the new home. While she would not be mortgage-free, she would have a loan product that didn’t require a payment. Once she learned the details she agreed that this was the best option.

The next step was managing the transition to the new home. It was clear that making an offer on a new home without having the proceeds of her prior home sale (an offer contingent on the sale of a prior residence) would not work in today’s low inventory housing market. I asked her if she had a short term living situation available to her during this process. She made some inquiries and found that her son had enough space in his home in San Mateo for her to live for a short period. She then moved to that home, sold her Palo Alto home, and now had sale proceeds in hand for a down payment.

In the offer process it was necessary to educate her agent and listing agents about how reverse mortgages work in a purchase environment, as this option is not well known in the real estate community. In reality an FHA reverse mortgage is just another form of home loan.

My client found a perfect home for her needs and was able to purchase it with a down payment of approximately $420,000, providing a home loan with no required mortgage payment and allowing her to retain approximately $110,000 of her prior home sale proceeds that she will use to provide for a more comfortable lifestyle.