The simplest way to understand it, is to first understand that an FHA HECM loan is a mortgage loan. Simple.
- Loan Amount + Down Payment = Purchase Price
Of course you have to add in the closing costs as well. Not only does the buyer have to bring in a down payment, they also will deposit funds to cover their closing costs. So now it looks like this:
- Loan Amount + Down Payment + Closing Costs = Total Cost of Buying.
An FHA HECM (Reverse Mortgage) will not loan a typical percentage of home value. The loan amount is figured with a formula set by FHA which takes into account three factors:
- Age of the youngest borrower.
- Expected Interest Rate
- Purchase Price or Appraised Value (whichever is less)
The required down payment is higher than the normal 3.5%, 10% or 20% that you see in traditional forward financing. Think more like 35% to 50% down.
That’s a big down payment - so why would someone want to buy with a reverse?
- Limited income qualifying. Traditional debt to income ratios are not used.
- Credit Scores not an issue. (Tax liens, judgments, and some foreclosures are though)
- No monthly mortgage payments means more monthly cash flow.
- You can afford to buy a higher value home. (safer, newer, less maintenance, gated, etc.)
- Owner Occupied Only
- Single Family Residences (1 to 4 Unit)
- Some Manufactured Homes
- FHA Approved Condominiums
- All buyers must all be over the age of 62
- Borrowers must complete a counseling session provided by a HUD Certified HECM Counselor.
- New Reverse Mortgage must be the borrowers only FHA Mortgage
The start of 2012 has brought an increase of Reverse For Purchase buyers my way because it is such a great time to buy a home. It may be a solution for you, your parents or clients, so please feel free to reach out to me and we can brainstorm about the possibilities, benefits and potential pitfalls.