Do you know that by 2060, the number of Americans 65 or older is projected to more than double from 46 million to over 98 million? That age group represents 15 percent of Americans. In 2060, it will increase to almost 24 percent.
These are statistics from the Department of Health and Human Services’s Administration on Aging. As we grow older, we often feel the need to downsize; our kids have their own homes, and our present home is either too large, no longer adaptable to our physical needs or both. Or we want to be closer to our grown children and our grandchildren.
If you’re in that category, you may have thought about a special kind of reverse mortgage — known as a Home Equity Conversion Mortgage for Purchase, HECM for Purchase or simply H4P. The typical reverse mortgage allows homeowners over 62 to tap into the equity on the present home and either get a line of credit or a lump sum of money. The H4P allows you to buy a house using a reverse mortgage loan. While an interesting concept, the program isn’t for everyone. You should fully investigate the benefits and drawbacks before making a decision.
Here’s how it works: You have to be at least 62 years old. If your spouse is not that old, he or she cannot be on the title.
In general — and depending on your age at the time you apply — you will be able to receive a reverse mortgage loan of between 47 percent and 52 percent of the purchase price of the new home. The older you are, the more money you are eligible to receive. This means you have to come up with the balance. Typically, if you plan to sell your current home, you can use the sale proceeds to make up the difference. And if you have sufficient income from other sources, you can even keep your current home as an investment and still be eligible for the reverse mortgage.
There are a few requirements: You and your spouse must live in the new property. It must be your principal residence. You must go through consumer counseling. The lender and the government want to make sure you fully understand what you are pursuing. And you must prove you are financially able to pay the real estate taxes, insurance, general maintenance and upkeep costs, and any applicable community association dues.
To be eligible for this kind of reverse mortgage, the property can be a single-family house, a two-to-four-family residential property so long as you live in one of the units or condominiums that have been approved by the Federal Housing Administration.
That is a problem because the FHA has recently imposed requirements that for a condominium to be eligible for an insured FHA loan, the association’s financial reserves must equal at least 20 percent of its annual budget.
Additionally, no more than 10 percent of all units can be delinquent in paying their assessments. Unfortunately, a large number of associations throughout the country cannot meet these requirements. Time will tell how this will play out under the new administration.
There are significant benefits with a reverse mortgage for purchase, but there are also several downsides. On the positive side, not only will you pocket some of the sale proceeds from your old house but you also do not have to make mortgage payments. You can use the money you save for whatever you want.
On the other hand, because there are no mortgage payments, the loan balance increases on a monthly basis. At some point, it can — and may — exceed the market value of the house. For those of us who want our children to inherit the house on our death, this may not be desirable. But the good news is that under no circumstance will you — or your estate — have to pay the lender a deficiency between the market value of the house and the outstanding loan balance. It is insured by the FHA.
This is just one of a number of options seniors should consider. Talk with your children; discuss the pros and cons with your financial and legal advisers. Once you decide this is what you want, make sure you work with a certified reverse mortgage professional.
Although this reverse mortgage process is just like any other loan closing, there are a few more conditions. As mentioned, the buyer must meet with a counselor. The closing must be completed within 60 days from contract signing. And if you are buying in a new development, you cannot sign a contract until the property has been issued a certificate of occupancy.
And finally, although the seller can pay the costs that are typically — by custom or law — imposed on the seller, the seller cannot give monetary concessions, such as paying some or all of the buyer’s closing costs.
However, the parties can certainly incorporate any such concessions into the purchase price, so long, of course, as it does not exceed the appraisal price.