How to Buy A Home with A Reverse Mortgage in Southern California
Homebuyers over the age of 62 may wish to consider financing their new primary residence with a reverse mortgage. Prior to 2009, reverse mortgages were only available as an option for refinancing a senior’s current home, now they can be used to buy a new home. Perhaps the best way to explain the process is with a common scenario.
Mr. & Mrs.G, recently decided to move closer to their children and grandchildren They had lived in their previous home for 40 years where they had raised their children. As the kids grew up, finished college and started their careers, they all seemed to relocate to newer areas of development east of Los Angeles where homes were less expensive and newer. Now, in their early 70’s Mr. & Mrs. G were still living in the old family home. They had taken out a new $200,000.00 mortgage on their home in 2001 in order to update it, and to help the kids with down payments on their own homes. Their mortgage payments were a tad over $1,400 per month. Mrs. G was still working but looking forward to retiring when they moved. They listed their home in LA and it sold quickly for $399,000.00 of which they netted $200,060 after closing fees, commissions and mortgage payoff.
Now, what to do with that $200,060.00? They could pay all cash for their new home, if they could find one they liked in that price range or they could put part of it into savings, use the rest as a downpayment and obtain regular financing and commit to a new mortgage payment. They did neither, instead they purchased their new home with a Reverse Mortgage for financing. Their home’s purchase price was $320,000.00 here’s how it worked out for them.
They put a total of $102,100 of the proceeds from the sale of the prior residence as a down payment on the new home and another $11,000 as closing costs for a total cash investment of $113,000.00. The rest of their money was safely invested per the advice of their financial planner. The closing costs on a reverse for purchase are comparable to most FHA loans which also include upfront Mortgage Insurance Premium (MIP).
The new reverse mortgage amount was $217,900.00 at 5.06% (this may not necessarily reflect current rates).
Pros
- No required monthly mortgage payment - EVER (But if they wish to make payments they can, that would help to keep the balance lower)
- Mrs. G, is able to retire as they do not need her income to make a mortgage payment.
- Retirement savings was given a big boost with the rest of the proceeds from the sale of the prior home.
- No capital gains taxes on the sale of their prior home as they used the one time exclusion allowed home sellers 55+ on their primary residence.
- They own their home, and the reverse mortgage does not have to be repaid until after they have both permanently left it due to sale, death or illness.
Cons
- The balance on the reverse mortgage will go up, every month, causing them to have less equity.
- This would effect the amount of funds they would be able to realize should they choose to sell their home in the future.
- It is possible to be upside down on a reverse mortgage if home values fall again, and/or if the seniors live a very long time.
- If the loan becomes due & payable because of the death of the last remaining borrower, there may not be any equity left for the heirs, though there can be no deficiency judgment on a HECM reverse mortgage as it is a non-recourse loan.
Mr. and Mrs. G and their children discussed both the pros and cons of financing their new home with a reverse mortgage. And the couple also had a separate discussion with their financial advisor about it as well. In their case, a reverse mortgage for purchase made sense, and allows them to enjoy more time with their grandchildren and they are living now in a newer home (less maintenance) in a 55+ gated community where they have already made many new friends and have found lots to get involved with.
You know what they did - here’s how they did it.
1. Listed their home with an SRES Certified Realtor.
2. Met with their reverse mortgage consultant to become educated about their reverse mortgage options.
3. Attended HECM Counseling over the phone and received their counseling certificate.
4. Began shopping for their new home with their SRES Realtor.
5. Made a good faith deposit & offer on the new home, contingent upon obtaining the reverse mortgage, using FHA language in the contract and relying upon their loan officer and Realtor to educate the seller and seller’s agent about the Reverse For Purchase.
6. Provided a signed loan application, appraisal deposit and required documentation to their loan officer.
7. Upon the closing of their old home, funds were wired to the escrow holder (verified) and their new reverse mortgage loan documents were signed, the loan funded and the escrow closed.
As always, this post contains my own thoughts, opinions and ideas and does not necessarily reflect those of my employer. Fees shown are estimates only and should not be used to determine your own or your clients costs. For a cost worksheet scenario for a particular situation please contact me or a knowledgeable reverse mortgage professional.
Deborah Nance
Your Local Southern California Reverse Mortgage Professional
Dear Deborah,
Thanks for the thorough explanation. Always good to be reminded that laws and options are changing every day. Reverse mortgages engender a lot of strong feelings when discussed. Your presentation was clear.
Have a happy day -
Lynn
Sounds like someone was thinking and helping the seniors and their situation.
Hi Deborah,
Great informatin for anyone, especially for seniors and their families.
While reverse mortgages aren't for everyone, they definitely work for some.
One of my clients used a reverse a little over a year ago herself to buy a townhome. She loves the idea of not having a mortgage payment for the rest of her life.
Thank you for the comments, Lynda, Tim and Lynn! I'm glad to see that my posts do get read! You are all spot on in your comments. When reverse mortgages are done for the right client and for the right reasons they can be an extremely effective tool for aging in place. I think it is very important to involve one's family and financial advisor in the decision making process.