Are you a builder or real estate professional with senior clients eager to move out of their current homes and into new ones — if only they could do it in such a way that they didn’t have to exhaust all or most of their home sale profits or retirement savings?
If you have clients like that, prepare to share with them what a HECM (Home Equity Conversion Mortgage) loan for Purchase is and how they can use one to get the home and lifestyle they want.
A HECM for Purchase combines the funds provided by a reverse mortgage loan with the proceeds from the sale of your client’s current home – or from other savings and assets – to help your client purchase a new principal home.
Let’s take a closer look at who might be especially good prospects for a HECM for Purchase before taking a deeper dive into how the loan actually works.
Your Clients’ Needs Change
According to data from the U.S. Census Bureau, the average person in the United States changes residences more than 11 times in their lifetime.
For the general population, reasons for moving can be as numerous as there are people on the move — moving to take a new job, moving to shorten the work commute, moving to a community with higher-rated schools.
For older Americans, however, their reasons for wanting to move may be vastly different. Their current home may no longer serve their needs as it once did. Maybe they have trouble getting up the stairs in their two-story home. Perhaps, their home that never seemed big enough when their kids were growing up is now more house than they can handle. Possibly, many of the neighboring families that they once socialized with at their kids’ softball and soccer games have moved away.
As many reasons as your clients may have for moving, they may ultimately decide to stay put. You have to respect these feelings. Human nature as it is, it’s not always easy to give up the familiar for something new or unknown. Yet, as a trusted service provider devoted to the success of your clients, you want to offer them a full range of potential solutions to help them retire better.
Give Your Clients a New Financial Tool
In working with your clients, you may have determined that they have a strong desire to move, but they’re still struggling with how to make it work financially. They clearly understand the cash advantages of downsizing to a smaller home, but what if the home they end up wanting to purchase — closer to family, friends and the services most important to them — can only be found in a more expensive area? If they feel that they have to pour all or most of their home sale profits into their next home — money they had planned on banking or investing for their retirement — they may conclude they’re really no better off financially.
This is exactly your opportunity to explain to them that they may not have to use all their home sale proceeds, retirement savings or other assets to buy the new home they want. This is the time to introduce and explain exactly how a HECM for Purchase loan works.
How a HECM for Purchase Works
|Home Purchase Price
|Funds from Borrower
|Est. Loan Proceeds
|Monthly Loan Payment
*Borrowers must continue to pay property taxes, homeowners insurance and maintain the home.
Example based on the youngest borrower age 65. The Annual Percentage Rates for examples above ranges from 5.568% to 5.764% and rates are subject to change without notice. The estimated funds from borrower and estimated loan proceeds exceed the purchase price in all examples because closing costs are included.
Let’s get right to it. Say, your clients sell their home, which they owned free and clear, for $750,000. They figure that if they can buy a new place for $300,000, they would have $450,000 to invest for their retirement. But after considering different locations and models, and receiving a reality check about the current state of the housing market, they adjust their purchase range and select a place for $500,000. The higher-priced home is a better fit all the way around. The layout is perfect. It offers more amenities and upgrades they really like, and it’s closer to family and friends. The downside, of course, is their $500,000 home purchase will now leave them only $250,000 to invest, not the $450,000 they were counting on.
This is where you get to show your clients that they can purchase the higher-priced home and also have more money to invest (around $450,000) by using a HECM for Purchase to buy their new place.
Here’s How the Magic Unfolds
With a HECM for Purchase loan, your client would be required to put down $290,684 on their $500,000 home purchase, based on the chart above and an APR that ranges from 5.5% to 5.8%. The down payment will be determined by other factors as well, including the age of the youngest borrower or non-borrowing spouse.
If your clients object that the last thing they want are more mortgage payments, you (or most likely the lender you’re working with) get to tell them that a HECM for Purchase doesn’t require any. The estimated $229,500 (column three, row three) needed to complete the $500,000 home purchase will be provided in the form of a reverse mortgage that they don’t need to repay until they leave the home. Although they won’t have mortgage payments, they are still responsible for their new home’s upkeep as well as the payment of all property taxes and homeowners insurance.
To be eligible for a reverse mortgage, your clients must be 62 years of age or older by the time their loan closes and they must agree to live in the home as their primary residence. Once their loan closes, they will have 60 days to move into the home.
As for the down payment (the $290,684 in our example), they can use proceeds from qualifying sources, such as their home sale proceeds, along with personal savings and investments. Cash gifts are not allowed.
Here it’s important to note that your clients don’t need to sell their existing home to qualify for a HECM for Purchase. Indeed, they may have always been renters and are first-time homebuyers. However, if they choose a HECM for Purchase, as a cash preservation strategy, their new home must serve as their primary residence.
The types of properties that can be purchased with a HECM for Purchase include single-family homes, two- to four-unit homes with one unit occupied by the borrower, condominiums approved by the U.S. Department of Housing and Urban Development, and FHA-approved manufactured homes.
When is the HECM for Purchase Due and Payable?
Typically, a HECM for Purchase doesn’t become due and payable until your client leaves the home, an event triggered by the sale of the property, absence from the property for an extended period or the borrower’s death. Failing to honor the terms of the loan, such as not paying property taxes or homeowners insurance, could also lead to a default and foreclosure.
Repayment includes the amount borrowed, plus accumulated interest. Any remaining equity belongs to the borrower, heirs or estate. If the loan balance exceeds the home’s value, neither the borrower nor the borrower’s heirs are responsible for making up the shortfall. In this situation, the heirs also have the option of buying the home for 95 percent of its appraised value, which could be a big plus if the required new appraisal comes in substantially lower than the original appraisal on which the HECM for Purchase was based.
If you’re a builder or a real estate agent, you have an opportunity to increase sales by providing more tools and solutions for your clients. One of those tools, when used with precision and a clear retirement strategy, is a HECM for Purchase.
Start a conversation today with your clients who may be ready to make their next move toward a better retirement.