What are the qualifications for a reverse mortgage purchase loan?
Within this page you will find everything you need to know about a reverse mortgage purchase loan. We will start by helping you find a realtor or builder that has been educated on and is comfortable with reverse mortgage purchase loans. We have created a comprehensive HECM for purchase guide that should answer most of your questions about the product. Last but not least, our checklist will help walk you through the process in the most time efficient way. When you are ready for a purchase estimate, just use this link or give us a call.
Who Should Consider Using a HECM for Purchase Loan?
To be eligible for a reverse mortgage loan, you must be 62 years old at the time of closing. A couple can be eligible when one spouse is at least 62, but you’ll want to read our article on non-borrowing spouses before proceeding.
We are of the opinion that a reverse mortgage purchase loan is an appropriate financial tool for a wide variety of customers. The first category of customer is one that may not have much of a choice in their financing options. This can include customers that:
- Have limited cash to purchase the home and taking on a conventional loan would not be good for their monthly cash flow
- Don’t qualify for a conventional loan due to debt to income ratios
- Have credit issues that aren’t acceptable to conventional mortgage lenders, but may be okay with reverse mortgage lenders
The second category of customer is one that is considering buying with all cash or using a conventional loan instead of a reverse mortgage. We believe there is a strong argument to be made that the reverse mortgage is the better fit when the customer is purchasing a home for the long term. Our guide compares the various purchase options and does a side by side financial analysis.
Reverse Mortgage Purchase Calculator
Below you will find the table you can use to calculate the required cash needed to purchase your next home, assuming an expected rate of 5.06% or less. The columns are the youngest borrower’s age and the corresponding figure is used to calculate the gross loan amount. For example a 65 year old can borrow 54.2% of the purchase price of the property (or appraised value, whichever is lower).
How Much Are The Closing Costs?
Depending on current market conditions and the purchase price, origination fees can range from $0 – $6,000. Often, the largest closing cost is the upfront FHA mortgage insurance premium. On a purchase loan where the entire proceeds are used to acquire the home, the fee is 2% of the purchase price or appraised value, whichever is lower.
If you want to get creative, you can reduce this closing cost to 0.5% by using an adjustable rate reverse mortgage to purchase the home. You would take 60% of the reverse mortgage loan and buy the home. The remaining 40% could be drawn out of the loan twelve months after closing. This would require you to put more of your own cash in initially, but you would get it right back after twelve months.
The remaining fees can vary greatly due to differences between states, contract negotiations, property specific items, etc. It’s best to contact us for a detailed estimate if you are getting ready to sign a contract.
One important thing to keep in mind with HECM for purchase loans is that HUD doesn’t allow seller concessions. The seller can only pay the closing costs that are typically seller paid in the county in which you are purchasing. That can vary greatly, depending on where you are buying. It’s best to negotiate on purchase price and not on any kind of seller concession.
What Kind of Properties Are Eligible?
No matter the type of property you are looking to buy with a reverse mortgage purchase loan, it has to meet FHA minimum property standards before you can close the loan. The appraiser will cite any repair issues and they have to be corrected prior to closing, typically by the seller. Given this requirement, it’s difficult to purchase a home as-is that wasn’t maintained by the previous owner.
When it comes to new construction, HUD has a rigid rule about certificates of occupancy. We cannot begin the application process until the certificate of occupancy is issued. The only step you will be able to complete in advance of the CO is the counseling. Unfortunately, there is no exception to this requirement.
Acceptable property types include:
- Single family homes
- 2-4 unit homes (on a case by case basis)
- Townhomes (you own the land)
- Condos (must be FHA approved)
- Manufactured homes (must meet HUD’s guidelines)
- Leasehold properties (must meet HUD’s guidelines)
The property types that are ineligible include:
- Co-op units
- Condos that aren’t FHA approved
- Manufactured homes in an unapproved condo project
- Berm homes
- Geodesic homes
- Homes on Indian tribal land
- Mixed use properties (more than 25% is used for non-residential purposes)
How Do I Know If I Qualify?
Before March 2, 2015 the qualification process was fairly simple. If you didn’t own other property, we weren’t doing any debt to income testing. Credit wasn’t scrutinized heavily, outside of bankruptcies and federal tax liens. It was all about the property appraising for the purchase price and you having funds that we can document for the purchase.
Now we have to determine if you are financially capable of paying your own taxes and insurance. If you are deemed incapable, you’ll be required to have a lifetime set-aside for future property charges (taxes, insurance, and HOA fees). That can be a sizable amount of money that would need to be involved in the set-aside versus being credited towards the purchase price.
We go into much more depth on this topic here, so feel free to read up on the new process. It’ll be more important than ever to speak with a loan officer that works with reverse mortgages only and really knows the process well. Once we have a copy of your credit report and know your income & assets, we should be able to do a quick qualification in 15-30 minutes.
Where Can The Down Payment Funds Come From?
The most common way for someone to use the reverse mortgage purchase loan is to sell their previous residence and use the proceeds as the down payment for the new home. The trick is getting the timing right with the previous sale versus the new purchase. You can do a simultaneous close if you are comfortable with the risk involved.
If you are going to use your own assets, keep in mind that we will need 90 days of complete bank statements showing the funds in the account for that period of time, at a minimum. If there are any large deposits in those 90 days, we’ll need to document where they came from. Gift funds from friends and family are perfectly acceptable, but we’ll need to document them, just like we would your own funds.
For more answers to the question ‘What are the qualifications for a reverse mortgage purchase loan?’, please contact us and speak with a professional.