How Is a Reverse Mortgage for Purchase Different from a Traditional Reverse Mortgage?

When it comes to reverse mortgages, many people are familiar with the concept of borrowing against the equity in their home to receive tax-free funds. However, not everyone is aware of the various options available, especially the distinction between a traditional reverse mortgage and a Reverse Mortgage for Purchase (HECM for Purchase). This article will explore the key differences between these two types of reverse mortgages and help you understand which might be the best fit for your needs.

What is a Traditional Reverse Mortgage?

A traditional reverse mortgage is a loan that allows homeowners aged 62 or older to convert a portion of their home equity into loan proceeds. These proceeds can be received in various forms, such as a lump sum, monthly payments, or a line of credit. Unlike traditional loans, there are no monthly mortgage payments required. The loan is repaid when the homeowner moves out of the house, sells it, or passes away.

One of the most common types of traditional reverse mortgages is the Home Equity Conversion Mortgage (HECM), which is backed by the U.S. Department of Housing and Urban Development (HUD). The primary advantage of a traditional reverse mortgage is that it allows homeowners to age in place, providing them with additional financial resources during retirement without the need to make monthly payments.

However, it’s important to note that traditional reverse mortgages only provide funds based on the equity in your home. The amount you can borrow depends on factors like your age, the appraised value of your home, and current interest rates.

What is a Reverse Mortgage for Purchase?

A Reverse Mortgage for Purchase (HECM for Purchase or H4P) is a relatively newer option for homeowners who wish to purchase a new home using the proceeds from a reverse mortgage. In this arrangement, the borrower sells their existing home, applies for the reverse mortgage, and uses the proceeds to buy a new primary residence. Much like a traditional reverse mortgage, the borrower does not make monthly payments, and the loan is repaid when they sell the home, move, or pass away.

The HECM for Purchase program is a great solution for older homeowners who want to downsize or relocate but need additional financial resources to do so. This type of reverse mortgage allows them to purchase a home that better fits their needs without worrying about monthly mortgage payments.

How Do Jumbo Reverse Mortgages Differ from Traditional Reverse Mortgages?

While traditional reverse mortgages (HECMs) are available up to the limits set by HUD, jumbo reverse mortgages are designed for higher-value homes. Unlike HECM loans, which have a lending cap, Jumbo Reverse Mortgages provide larger loan amounts for properties that exceed the HECM limit, allowing homeowners to access more of their home equity.

For borrowers with high-value homes, a Jumbo Reverse Mortgage might be a more fitting choice, especially when a traditional reverse mortgage doesn’t provide enough funds for their needs. The Jumbo Reverse Mortgage is often used by homeowners looking to access a larger portion of their home’s equity while still benefiting from the unique features of a reverse mortgage, like no monthly payments and the ability to remain in the home as long as they wish.

However, Jumbo Reverse Mortgages are typically offered by private lenders and may have different terms and requirements compared to the government-backed HECM loans.

Key Differences Between Reverse Mortgage for Purchase and Traditional Reverse Mortgages

1. Purpose and Use of Funds:
• Traditional Reverse Mortgage: The funds from a traditional reverse mortgage are typically used to supplement retirement income, pay for healthcare expenses, or fund other personal needs. Borrowers can use the funds as they wish, including using them to pay off existing debt or improving their home.
• Reverse Mortgage for Purchase: The funds from a reverse mortgage for purchase are specifically used to buy a new home. This is ideal for individuals looking to downsize or relocate and who don’t want to worry about monthly mortgage payments.
2. Eligibility Requirements:
• Traditional Reverse Mortgage: To qualify for a traditional reverse mortgage, the borrower must be at least 62 years old and must live in the home as their primary residence. The amount you can borrow is influenced by your age, the value of the home, and the current interest rates.
• Reverse Mortgage for Purchase: The eligibility requirements for a reverse mortgage for purchase are similar to a traditional reverse mortgage. Borrowers must be at least 62 years old, and the home purchased must be their primary residence. The new home must meet FHA property standards and HUD requirements.
3. Use of the Proceeds:
• Traditional Reverse Mortgage: Traditional reverse mortgage funds can be used in a variety of ways, including debt consolidation, home improvements, or as additional income during retirement.
• Reverse Mortgage for Purchase: The proceeds from a Reverse Mortgage for Purchase are only allowed to be used to purchase a new primary residence. The borrower is required to sell their existing home in order to apply for this loan.
4. Home Equity Requirement:
• Traditional Reverse Mortgage: Homeowners are allowed to borrow up to a certain percentage of their home’s equity, with limits based on the appraised value of the home and the borrower’s age. These limits are set by HUD.
• Reverse Mortgage for Purchase: Similar to a traditional reverse mortgage, the amount a borrower can borrow is based on their home equity, the new home’s value, and the borrower’s age. However, there are additional considerations like the cost of the new home and other fees associated with the transaction.
5. Repayment:
• Traditional Reverse Mortgage: No monthly mortgage payments are required with a traditional reverse mortgage. The loan is repaid when the borrower sells the home, moves out of the home, or passes away. If the homeowner sells the home, the loan must be repaid at that time.
• Reverse Mortgage for Purchase: Similarly, the Reverse Mortgage for Purchase does not require monthly payments. However, the loan must be repaid when the borrower sells the new home, moves, or passes away.

What Are the Benefits of a Reverse Mortgage for Purchase?

The Reverse Mortgage for Purchase is an excellent solution for many retirees who want to relocate without worrying about monthly mortgage payments. Some of the benefits include:

• Downsizing Made Easy: If you wish to downsize, a Reverse Mortgage for Purchase can help you use the equity from your existing home to purchase a smaller or more manageable property without the need for monthly mortgage payments.
• More Flexibility: The ability to purchase a new home that suits your lifestyle or health needs (e.g., a single-story home for easier mobility) is a major advantage for older homeowners.
• No Monthly Payments: Just like a traditional reverse mortgage, the Reverse Mortgage for Purchase allows you to live in your home without the burden of monthly mortgage payments.

Conclusion

A Reverse Mortgage for Purchase and a traditional reverse mortgage serve similar purposes in that they allow homeowners to access their home equity without monthly payments, but they cater to different needs. While a traditional reverse mortgage is ideal for homeowners looking to supplement their income or cover other expenses, a Reverse Mortgage for Purchase allows individuals to use their home equity to buy a new home that better fits their needs. Depending on your situation, one of these options may be more suitable than the other.

If you are considering using a reverse mortgage for purchasing a home or to unlock the value of your current home, it’s essential to weigh all your options, including whether a Jumbo Reverse Mortgage might provide you with the funds you need. Always consult with a financial advisor to determine which option is best for your circumstances.