How Does the Reverse Mortgage / HECM for Purchase Program Work?

Normally, a reverse mortgage is used to convert the equity in your home into cash. One of the primary uses of a reverse mortgage is to pay off a mortgage or other property lien and therefore eliminate all payments associated with your home. By using a reverse mortgage to purchase a property instead of on a property you already own, you can bypass the need to ever have a forward mortgage.

If you have an adequate down payment, you can buy your dream home without any monthly payments at all.

With the HECM for Purchase program, instead of getting the reverse mortgage on your current home, you would inform your reverse mortgage lender that you wish to buy a new home using the reverse mortgage. The lender will then calculate the amount of money you qualify to receive as though you already owned the property. Your qualification and loan amount are calculated using:

  • Your down payment
  • The appraised value of the property
  • Your age

If you qualify for enough money to permit you to purchase the property, you can then do so, and live in the home for as long as you wish, as you would with a normal reverse mortgage.

The fees, interest rates, terms, and conditions of the loan are all identical to those of a normal reverse mortgage, meaning that you never have to make any payments for so long as you are living in the property. None of the money you borrow with the reverse mortgage has to be paid back until you (or your spouse) are no longer living in the property. However, it is important to note that the home must be maintained and all taxes and insurance must be paid for the duration of the reverse mortgage.

The home purchased with the aid of a reverse mortgage must become your primary residence.

Reverse Mortgage Refinance

What is a Reverse Mortgage?

A reverse mortgage is a loan for seniors age 62 and older. Home Equity Conversion Mortgage reverse mortgage loans are insured by the Federal Housing Administration (FHA)1 and allow homeowners to convert their home equity into cash with no monthly mortgage payments.2

After obtaining a reverse mortgage, borrowers must continue to pay property taxes and insurance and maintain the home according to FHA guidelines. Typically the loan does not become due as long as you live in the home as your primary residence and continue to meet all the loan obligations.

Reverse mortgage loans are commonly used to pay for home renovations, medical and daily living expenses. Homeowners who have an existing mortgage often use the reverse mortgage loan to pay off their existing mortgage and eliminate monthly mortgage payments.

A reverse mortgage loan uses a home’s equity as collateral. The amount of money the borrower can receive is determined by the age of the youngest borrower, interest rates and the lesser of the home’s appraised value, sale price and the maximum lending limit. The funds available to you may be restricted for the first 12 months after loan closing, due to HECM requirements. In addition, you may need to set aside additional funds from loan proceeds to pay for taxes and insurance.

The loan does not generally have to be repaid until 6 months after the last surviving homeowner moves out of the property or passes away. At that time, the estate typically sells the home to repay the balance of the reverse mortgage and the heirs receive any remaining equity. The estate is not personally liable for any additional mortgage debt if the home sells for less than the payoff amount of the reverse mortgage loan.

Reverse Mortgage Eligibility

To be eligible for a reverse mortgage loan, the FHA requires the youngest borrower on title to be 62 years or older. Borrowers must also meet financial eligibility criteria as established by HUD. If there is an existing mortgage on the home, it must be paid off with the proceeds from the reverse mortgage loan.

Eligible Homes Types for Reverse Mortgages

Most single-family homes, two-to-four unit owner-occupied dwellings or townhouses and approved condominiums and manufactured homes are eligible for a reverse mortgage loan. The home must meet FHA minimum property standards.

Inheritance

When the reverse mortgage loan does become due, the borrower’s heirs/estate can choose to repay the reverse mortgage loan and keep the home or put the home up for sale in order to repay the loan. If the home sells for more than the balance of the reverse mortgage loan, the remaining home equity passes to the heirs.

If the home sells for less than the owed balance, the estate is not required to pay more than the value of the home at the time the loan is repaid.

A reverse mortgage loan is “non-recourse”, meaning that if you sell the home to repay the loan, you or your heirs will never owe more than the loan balance or the value of the property, whichever is less; and no assets other than the home must be used to repay the debt.

Distribution of Funds

Reverse mortgage loan proceed can be received in any combination of the following options:

  • Line of credit – draw as needed up to the maximum eligible amount
  • Lump sum – a lump sum of cash at closing (only available on fixed-rate loans)
  • Tenure – monthly payments for the life of the loan
  • Term – monthly payments for a specific number of years

Borrowers may access the greater of 60 percent of the principal limit amount or all mandatory obligations, as defined by the HECM requirements, plus an additional 10% during the first 12 months after loan closing. The combined total of mandatory obligations plus 10% cannot exceed the principal limit amount established at loan closing. The borrower may also need to set aside additional funds from the loan proceeds to pay for taxes and insurance.

HARP

What is the HARP Program?

When you have little equity in your home or owe as much or more on your mortgage than your home is worth, it can be difficult to find a lender willing to help you refinance. But for borrowers who have remained current on their mortgages, and have loans owned by Fannie Mae or Freddie Mac, there is hope. It’s called HARP.

Introduced in March 2009, HARP enables borrowers with little or no equity to refinance into more affordable mortgages without new or additional mortgage insurance. HARP targets borrowers with loan-to-value (LTV) ratios equal to or greater than 80 percent and who have limited delinquencies over the 12 months prior to refinancing.

Significant changes have been made to HARP since the program was first introduced. For example, in 2011 the LTV ceiling was removed, property appraisal requirements were waived in certain circumstances, certain risk fees for borrowers selecting shorter amortization terms were eliminated, and certain representations and warranties were waived. In 2013, the eligibility date was changed from the date the loan was acquired by Fannie Mae or Freddie Mac to the date on the note, increasing the pool of eligible borrowers.

Through HARP, you can get a lower interest rate (which means less out-of-pocket costs each month), get a shorter loan term, or change from an adjustable to fixed-rate mortgage. There’s no minimum credit score needed, either.

And now that HARP guidelines are simpler, even people who were formerly turned down may now be eligible for HARP refinancing.

How can HARP help me?

If you are current on your mortgage; have a mortgage that is owned by Fannie Mae or Freddie Mac, and owe as much or more than your home is currently worth, you may be eligible for HARP refinancing. That can mean significant savings by:

  • Lowering your monthly payment
  • Reducing your interest rate
  • Securing a fixed-rate mortgage that won’t change over time
  • Building equity faster—shorter term options may be available
  • Lower closing costs because an appraisal is not usually required

HARP program includes:

  • No underwater limits Borrowers will now be able to refinance regardless of how far their homes have fallen in value. Previous loan-to-value limits were set at 125 percent.
  • No appraisals or underwriting Most homeowners will not have to get an appraisal or have their loan underwritten, making their refinance process smoother and faster.
  • Modified fees Certain risk-based fees for borrowers who refinance into shorter-term loans have been reduced.
  • Less paperwork Certain risk-based fees for borrowers who refinance into shorter-term loans have been reduced.
  • Program Deadline The end date to get a HARP refinance is December 31, 2018.
Get Offers