What the heck is a HECM for Purchase?
HECM is the Acronym for HUD insured reverse mortgages. It stand for Home Equity Conversion Mortgage...and it has a use that is currently something that many Realtors and even fewer homebuyers have heard of. A HECM can be used to buy a home. Today, we’re going to go pretty deep into the subject so that you can get an idea of how this program works and why it is so useful.
As we get older, our children move out, the house gets older and requires more maintenance, or the home is unsuitable for aging in place. So you think about “right-sizing” finding a home on one level, with low maintenance in a safe community, with convenient access to amenities, like doctors, transportation, shopping and activities. Maybe something closer to the kids and grandkids.
Many HECM for Purchase buyers come from OC and LA where they raised their families and then want to move out to the IE to be close to the kids as this is where the kids have moved to raise their own families. Housing was more affordable and FastTrac, Metrolink have made the commute to jobs easy and affordable. Not to mention all of the jobs that have grown up right here in the IE. Lots of logistics, medical, retail, manufacturing and other companies have settled here and provide good jobs and a nice lifestyle. There are great universities and advanced education opportunities right here in the IE for the grandkids to get a great education.
So, you decide, Yep. I want to be close to the grandkids. I want to be a part of their lives. But!! I don’t want to live with them! Oh heavens no!! You want your own place. So the conversations begin. Do we sell and buy a new home. Do we sell and rent a home or apartment? Do we move to a 55+ community. What tax consequences will we have if we sell? What about our Prop 13 property taxes? Yikes!! This is a good time to talk with your financial advisor AND a knowledgeable Realtor about all these options.
You might especially want to learn about Prop 60/Prop 90 benefits that allow you to transfer the assessed value of your current home to your new home. Proposition 60 allows transfers of base year values within the same county (intracounty). Proposition 90 allows transfers from one county to another county in California (intercounty) and it is the discretion of each county to authorize such transfers.
One more option to discuss is buying your new home with a reverse mortgage. How does that work exactly? And what are some of the benefits and drawbacks?
If you decide to buy you have a couple of options.
You could pay cash for your new home. No monthly mortgage payments, no compounding interest.
You’ve depleted your liquid cash assets by paying 100% cash. You could obtain a traditional mortgage: The advantage here is that you can move into your home with only a down payment, maybe 10% or 20% down. The disadvantage is that now you have 15 or 30 years of mortgage payments again, reducing your cash flow for quite a few years into the future.
Or you could buy with a reverse mortgage. One benefit to this is that you’re not paying cash for the entire sales price. Instead you are putting in a down payment of 48% or less (depending upon age) and the reverse mortgage will loan the rest. The benefit of this method is that like a cash purchase you have no required monthly principal and interest payments, ever. You are responsible to keep the home insured, remain current on property taxes and HOA, maintain the property and LIVE IN THE PROPERTY.
One disadvantage to the H4P is that you must live in the home as your primary residence. On a traditional mortgage, depending upon the loan terms, you may be able to convert the home to a rental. You would not be allowed to do that with a reverse.
So, now that you haven’t had to use all of your funds to buy you have to decide what to do with the funds that you didn’t have to use for a down payment. Do you invest it? Do you put it into savings? This is where a licensed, trusted financial planner can help you to make the best decision. I’ll say that there is no “right” decision because it depends upon your needs, wishes and circumstances. But how nice to have an asset that you can get advice on!! Good for you!!
What if, because you don’t have a house payment, instead you pay yourself a house payment, into your retirement account or other investment. Great things to talk to your financial planner about!
Ok - So you like the sound of this eh?? What’s next? How exactly do you go about doing this?
First - Give me a call. (951)283-2983
Let’s put a tentative outline together of what may be possible. Let’s talk about your credit history and income because you will need to qualify for a HECM4Purchase. The underwriters are going to look at your last 2 years credit history. They’re going to look to see if you have any judgements or liens. So we can talk about that and even run your situation by an underwriter to get a good sense of what you can qualify for. We can arrange a meeting or conference call with your financial advisor to get ideas and thoughts on what to do with your extra cash.
Second - Talk with a knowledgeable Realtor, preferably one who can handle selling your current home and helping you to find a new home. List your home. (even if you want to buy a brand new home, I’d recommend going through a Realtor, they have your interests at heart not the builder). Ask them if they are familiar and have worked with the Reverse For Purchase before. No worries if they haven’t just put them in touch with me and I will get them up to speed quickly, explaining to them how to present any offers you make on your replacement property to show the sellers why your offer is the best offer to accept..
Third - If you decide this is the way you’re going to go, then you will want to schedule your reverse mortgage counseling. Your counseling certificate is good for 6 months.
Fourth - Start Home shopping. You may want to wait until your current home is in escrow before you make any offers in order to be taken as a serious buyers.
62 - 58% Down plus closing costs
73 - 40% Down plus closing costs
85 - 30% Down plus closing costs
90 - 25% Down plus closing costs
What types of properties can you buy with a HECM for Purchase?
Single Family Homes of 1 to 4 units.
Manufactured Homes built after June 1976 that comply with Manufactured Home Construction Safety Standards
Condominiums approved by the U.S. Department of Housing and Urban Development.
Both borrowers should be over 62, but a younger spouse would be allowed. The downpayment amount would be adjusted upward based upon the younger spouses age. There are special rules for “non Borrowing Spouses” and if you or your spouse is under 62 you will want to be sure you understand those rules and protections clearly.
The money for your down payment must come from an allowable source like the sale of your current home, or from your savings or other investment accounts. The money for your down payment cannot be borrowed.
How long does a reverse for purchase take?? The escrow times for a reverse for purchase are very similar to a forward purchase loan. I like to have my buyers request a 45 day escrow, but we target closing within 30 days. Good preparation is the key to getting the transaction done quickly.
I hope you enjoyed our subject matter today and if you think a reverse for purchase could be in your future, it’s never too early to call and start the learning process. Knowledge is power you know. Call me, Deb Nance, today to discuss (951)283-2983
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