Should I Purchase My Retirement Home Using a Reverse Mortgage?
This is a question we often get asked by our clients who are relocating to Delaware. Financing options are always top of mind when you retire and more so when you relocate and retire. There are several financial options to consider. Of course, you may pay CASH, but that may not be the best option depending on your age and overall financial picture. Here are some other options to consider –
- Apply for a traditional mortgage. Retirement income is still income and you may qualify for a small mortgage that allows you to buy the home of your dreams. Some of our clients have found that a $100,000 mortgage on a $400,000 purchase enabled them to buy a home with those few upgrades that they really wanted.
- Buy your retirement home with a Home Equity Conversion Mortgage (HECM) or reverse mortgage.
Delaware has become one of the top choices for Baby Boomers in the Mid-Atlantic and North East when they prepare for retirement. We always want to share the latest information with you so you can make informed decisions about the best way to purchase your retirement home. Many people think that a HECM can only work as a refinancing vehicle on a home they already own. That is not true! We have worked with many clients on the purchase of a new construction home as well as the purchase of an existing home.
What is a Reverse Mortgage or HECM for Purchase and How Does it Work?
- A Reverse Mortgage for Purchase (or Home Equity Conversion Mortgage (HECM) for Purchase) allows homeowners, age 62 and over, to purchase a primary residence using the loan proceeds from the reverse mortgage.
- The money available to the borrowers is based on the lower of the appraised value or purchase price of the home, the age of the borrowers, and the current interest rate
- The borrowers utilize their own funds or investments to cover the difference between the reverse mortgage proceeds and the purchase price of the home. In other words, your own invested funds become the equity in your home.
- No borrowed money other than the reverse mortgage can be used for any part of the purchase of the new residence however, the entire down payment can be a gift from a close relation.
- Repayment occurs when the estate is settled, the home is sold, or it no longer is their primary residence
What are the Benefits of the HECM for Purchase?
- There is no monthly requirement to repay the reverse mortgage
- Credit score is not required. However, the willingness and capacity to meet financial obligations are required.
- If there has been a bankruptcy, the following pertains:
- Chapter 7 bankruptcy – at least 2 years have elapsed since the date of discharge. If date of discharge is less than 2 years and greater than 12 months case by case review of circumstance can be done
- Chapter 13 bankruptcy – any required payment plan must have at least 12 months of the payout period completed with a satisfactory payment history.
- Borrowers can purchase the new home and retain cash from the sale of their current home for their own use
- A borrower can afford at least twice the purchase price as a cash sale with no payments
- Qualification for a reverse is much easier. There is no mortgage payment, and just a residual income required on a reverse
- This is a non-recourse loan. Thus, the reverse mortgage does not show up on a borrower’s credit
- The borrower owns their home, remains on the deed like any other mortgages
How Do I Secure a Down Payment and Closing Costs?
- No secondary financing is permitted from ANY source
Acceptable sources of required funds include:
- Withdrawal from cash or retirement accounts
- Gift funds from acceptable sources
- Proceeds from the sale of the current residence
Unacceptable sources of required funds include:
- Secured or non-secured loans from other assets, such as home equity loans on investment property or second homes
- Bridge loans, seller concessions, loan discount points, interest rate buy downs, closing cost assistance or lender credits
To find out more about Reverse Mortgages, please contact your Active Adults Realty® agent at your convenience. Call us at 302-424-1890 or email Broker@ActiveAdultsRealty.com. We will be happy to share our knowledge with you and put you in touch with a Delaware HECM specialist.