Every once in a while something so odd happens that you spend the next few days…or weeks…or MONTHS – if it’s odd enough – processing the details.
Exactly a year ago I was in the middle of a complex HECM for Purchase transaction. It involved a knotty situation in which a builder had declared bankruptcy before completing construction on a condo, and another builder had finished the project. However, the new guy had never put some of the completed phases to record. I will sum up the details of the situation simply by saying Uncle Sam does not smile upon this business model.
After a couple weeks mucking about for resolution utilizing the obvious channels, such as the homeowners association attorney – whose job description, incidentally, does include this type of thing – I decided to go to the top of the food chain and contact my client’s US Congressman.
Imagine my surprise when I received a mini-lecture from a congressional aide, who stated with great conviction, “You can’t BUY a home with a reverse mortgage. Reverse mortgage is a refi product. So put that in your pipe and smoke it, you dumb Reverse Mortgage Specialist.”
Ok, so maybe he didn’t say this last part. But it was implied.
Well, well, well, Mr. Aide, thank you for THAT helpful input.
So, is that to say you CAN you buy a home with a reverse mortgage?
In a word, yes!
So how does Reverse for Purchase – also known as HECM for Purchase – work? And why do so few people know about it?
The concept of HECM for Purchase could not be more straightforward: the home buyer provides a down payment, the size of which is determined by the home buyer’s age. The HECM loan provides the rest.
That’s it. End of story. You are in your home for the rest of your life – or as long as you want to live in the home as your primary residence – and never make a monthly mortgage payment.
This smells fishy. How can I live in a home and not make payments?
Answer: Not making payments is very different from saying the loan is never repaid. The loan is always repaid – it’s just that you don’t repay it. When you are finished with the home, the home itself repays the debt.
But when is the loan repaid?
Answer: The loan is repaid when the last person on title moves, sells, or dies. In other words, the loan is repaid BY THE HOME once the senior no longer needs the home.
But where does the money come from to repay the loan?
Answer: The home is either sold, and the proceeds from the sale repay the loan, or the family secures new financing and buys the home.
But what if the home has gone down in value and the proceeds from the sale can’t repay the loan?
Answer: The home repays what it can. Any shortfall is made up by the mandatory Mortgage Insurance Premium (MIP).
But what if I want to leave the house to the kids?
Answer: You can still leave the house to the kids: it’s still your house. The kids will need to: 1) line up their own financing, and buy the home, or 2) sell the house. However, they would have to do this anyway if you had a “forward” mortgage…AND they would have to make your mortgage payment every month after you were gone, or risk losing the house.
How long can I stay in my home?
Answer: As long as you want to. As long as you pay your property taxes, keep current on your homeowner’s insurance, and maintain the home, you never have to move. You can, however, move whenever you wish.
Ok, So Let’s Be Blunt: If this program is so great, why don’t more people know about it?
Answer: First, it has not been around all that long: FHA rolled it out just over three years ago. Second, despite a lot of money spent on financial education for seniors, there are still far too many people – like the congressional aide mentioned above – who are very bold in speaking very forcefully about topics they know very little about. And that is very unfortunate.
If you or someone you know needs to move into a home better suited to aging in place, the FHA-insured HECM for Purchase may very well make this possible.
I love answering questions about the financial health and the long-term well-being of our seniors. Give me a call – I always love hearing from you.
Laurie Denker MacNaughton [NMLS# 506562] · Reverse Mortgage Consultant · Middleburg Mortgage, a Division of Middleburg Bank · 20937 Ashburn Road, Suite 115 ·Ashburn, Virginia 20147 · 703-477-1183 Direct · LMacNaughton@MiddleburgBank.com · www.middleburgmortgage.com/lauriem
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