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.
By Deborah Nance
Your Local Southern California Reverse Mortgage Professional
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iReverse Home Loans, LLC, NMLS#810502 originates reverse mortgages in Alabama, Alaska, Arizona (MB-0919584), California, Colorado, Connecticut, Florida, Illinois, Indiana, Iowa, Kansas, Louisiana, Maryland, Massachusetts, Minnesota, Mississippi, Missouri, Nevada, New Jersey, New Mexico, Ohio, Oregon (ML-5378), Pennsylvania, South Dakota, Tennessee, Texas, Utah, Vermont (1164-MB), Virginia, Washington and Wisconsin.
Important Information: Reverse Mortgages are neither "endorsed" nor "approved" by the Federal Government. The FHA (Federal Housing Administration) provides certain insurance benefits for lenders and borrowers in connection with the lender’s HECM loans; the FHA does not make or originate loans. The owner(s) retain title to the property that is the subject of the reverse mortgage until the person sells or transfers the property and is therefore responsible for paying property taxes, insurance, maintenance and related taxes. Failing to pay these amounts or failure to maintain the condition of your property may cause the reverse mortgage loan to become due immediately. A reverse mortgage is a complex loan secured by your home. Whether such mortgage makes sense for you depends on your financial situation and needs. For these reasons, we strongly recommend that you consult with a qualified independent housing counselor, family members and other trusted advisers before making this decision. This website is not from HUD or FHA and was not approved by HUD or any government agency.