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For reverse mortgage loans: The borrower must meet all loan obligations, including living in the property as the principal residence and paying property charges, including property taxes, fees, hazard insurance. The borrower must maintain the home. If the homeowner does not meet these loan obligations, then the loan will need to be repaid. 

Using a Reverse Mortgage to Buy a New House

A reverse mortgage isn’t just for unlocking equity. It may also be a way to buy a new home.

For older homeowners, a Reverse Mortgage for Purchase may open the door to new possibilities. You might be ready to downsize to something more manageable, relocate closer to family, or retire to a more desirable location. No matter your goals, this approach may provide a more flexible and affordable way to move into the right home and enjoy the advantage of no required monthly mortgage payments.

Here’s what you need to know about using a reverse mortgage to buy a new home.

How to Buy a New Home with a Reverse Mortgage

The process of purchasing a home with a reverse mortgage is more straightforward than many people expect. First, you choose the home you want to buy and work with a lender who offers Reverse Mortgage for Purchase.

Next, you make a down payment, which is typically covered by proceeds from the sale of your current home, savings, or other available funds.

The reverse mortgage then finances the remaining portion of the purchase price. Because you are not required to make monthly principal and interest payments, the loan balance grows over time and is repaid when you move out, sell the home, or no longer meet the loan obligations. Throughout the life of the loan, you remain responsible for property taxes, homeowner’s insurance, and maintaining the property.

This approach may give you the flexibility to select a home that better fits your needs in retirement, while also easing the strain of ongoing monthly payments.

What Is a Home Equity Conversion Mortgage (HECM) for Purchase?

In 2008, the Federal Housing Administration (FHA) introduced the Home Equity Conversion Mortgage (HECM) for Purchase. This loan option allows eligible homeowners who are 62 or older to use FHA-insured reverse mortgage proceeds to buy a new primary residence.

A HECM for Purchase provides the same advantages and borrower protections as a traditional reverse mortgage. Instead of paying all cash or taking on a standard mortgage, you can use a reverse mortgage to finance part of the purchase price. With this option, you do not make monthly mortgage principal and interest payments. The loan balance, which includes accrued interest, becomes due when you move out, sell the home, pass away, or no longer meet the terms of the loan.

Eligibility requirements for a HECM for Purchase

The eligibility requirements for a HECM for Purchase are the same as those for a traditional reverse mortgage. To be eligible, at a minimum, you must:

•    Be at least 62 years old
•    Be current on any federal debts
•    Use the home as your primary residence
•    Show that you can continue to pay property taxes, homeowners (hazard) insurance, and any required homeowners association (HOA) fees, as well as other costs of owning the home
•     Complete a consumer information session with a HUD-approved HECM counselor
  • These requirements are designed to help ensure the loan is a good fit and that you have the financial stability needed to keep your new home in good standing.

Pros of a HECM for Purchase

A HECM for Purchase offers several potential advantages:

• You will not have a monthly mortgage principal and interest payment, which may help you preserve more of your retirement savings
• You may be able to purchase a more expensive home or afford upgrades that would not have been possible otherwise
• It may support your quality of life by helping you move into a home that better fits your needs, whether that means downsizing, relocating closer to family, or choosing a neighborhood you prefer

Cons of a HECM for Purchase

Using a HECM to buy a home is not the right choice for everyone. One of the most important considerations is how it may affect your estate. Because the loan accrues interest over time, there may be less of an inheritance left for your heirs after the loan is repaid than if you owned the home outright.

Reverse mortgages also tend to have higher interest rates and closing costs than traditional mortgages. However, many people feel that the benefit of not having to make monthly mortgage payments makes this trade-off worthwhile.

It is also important to note that not every property will be eligible. For instance, certain manufactured homes and cooperative units may not meet the requirements.

Because every financial situation is unique, it’s a good idea to consult a qualified financial professional before deciding if a HECM for Purchase is the right fit for you.

How to Apply for a HECM for Purchase

The application process for a HECM for Purchase is similar to a traditional mortgage, but there are a few important differences. You will need to work with an FHA-approved HECM lender, which may not be the same as your current financial institution.

You will also meet with a counselor from a HUD-approved housing counseling agency. This session helps make sure you fully understand how a reverse mortgage works and how it differs from other types of home loans.

As part of the process, the lender will:

• Review your credit history and verify that you can continue to pay property taxes, homeowners (hazard) insurance, and general upkeep on the home
• Conduct a financial assessment to confirm you do not have delinquent federal debt
• Order an appraisal of the property and complete a title search
• Collect documentation of your income, which may include Social Security, pension benefits, retirement accounts, investments, or other sources

These steps are designed to confirm that the loan is a good fit for your situation and that you can meet the ongoing responsibilities of homeownership.

Learn more about Reverse Mortgage for Purchase

If you are interested in learning more about purchasing a home using a reverse mortgage, the Consumer Financial Protection Bureau, the National Reverse Mortgage Lenders Association, and the U.S. Department of Housing and Urban Development are excellent and trusted sources.  

Exploring these resources, along with speaking to a qualified professional, can give you the knowledge and confidence to decide if a reverse mortgage is the right choice for your retirement plans.

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This article is intended for general informational and educational purposes only and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.