If the house where you raised your family isn't a good fit as you grow older, the U.S. Dept. of Housing and Urban Development may have a solution. HUD’s FHA-insured home equity conversion mortgage for purchase is a reverse mortgage that helps you relocate, downsize or move into a home that better accommodates your changing needs. The loan has the same benefits as a standard reverse mortgage, but you close on the loan and on a home sale in the same transaction.
How It Works
Because the HECM for purchase is a home-equity loan, to qualify you need enough equity to cover accrued interest, notes Kiplinger. Loan limits are based on your age: The older you are, the more you can borrow, and the less you need to pay up front. Your down payment equals the difference between the amount you’re allowed to borrow and the purchase price plus closing costs. You can apply the entire loan amount to the purchase price, or you can reserve some as a line of credit.
You must be at least 62 years old to qualify for an HECM for purchase. The home must be your primary residence. You can buy any existing single-family home that meets FHA standards, including a HUD-approved condo or a manufactured home. You may also buy a two- to four-unit home if you’ll live in one of the units, or a newly constructed home that already has a certificate of occupancy. The down payment must come from your own cash reserves -- you can't use borrowed money. And you must move into the home within 60 days after you close.
Repayment, with interest, is due when you sell the home or live away from it for 12 months. If you’re not able to repay, you can sell the home. You’ll receive whatever proceeds are left after the lender is repaid. If there aren’t enough proceeds to pay the lender, you won’t take any money from the sale, but you won’t be responsible for making up the shortfall. The FHA insurance covers that.
Things to Consider
Interest rates and loan fees for HECM loans, including the HECM for purchase, tend to be higher than rates and fees for conventional mortgages, according to U.S. News & World Report. In addition, you risk foreclosure if you fail to maintain and insure the home as required by the terms of your loan. Although your loan amount might be high enough to cover or offset upkeep and insurance costs, the more equity you use, the less likely it is that you or your heirs will be able to keep the house after you leave it for a year or longer -- to enter a care facility, for example -- or die.
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