When your clients are over 62 and considering the merits of a move as part of their retirement plan, you can provide an extra level of customer service by mentioning the option of the HECM (Home Equity Conversion Mortgage) for Purchase loan program.
While many people are familiar with the availability of a reverse mortgage to allow them to age-in-place, far fewer know about a similar FHA-insured loan program that can be used to buy a new or existing home.
“People get confused by this program, but it’s just a mortgage like any other, that needs to be repaid when the home is sold,” says Chris Bruser, a Home Equity Retirement and HECM for Purchase Specialist with Retirement Funding Solutions. “The difference is there are no monthly payments. The homeowners pay taxes and property insurance and homeowner association fees.”
The intent of the HECM for Purchase program, says David Weinstein, a senior loan officer with Concord Mortgage Group, is to allow people to use their home equity when buying.
HUD’s formula, which is a sliding scale based on age, interest rates and the value of the home to be purchased, mandates the amount someone can borrow with this program.
“The formula tells us how much a borrower needs for a down payment,” says Weinstein. “The range is from 45 percent to 60 percent. The older you are, the less you need to put down.”
He says someone who is 62 needs to make a down payment of about 60 percent of the purchase price. The average age of a HECM for Purchase borrower is 70.5, says Rob Cooper, national director for builders and Realtors, HECM for Purchase program with Reverse Mortgage Funding.
Customers who are attracted to this program usually either intend to buy with all cash or have significant cash resources for a down payment, typically from the sale of their previous home.
How to Explain HECM for Purchase Loans
Cooper recommends taking customers to a new community’s clubhouse or model home to talk about the HECM for Purchase program, which drives business to the community even if they end up using a different financing mechanism.
The only eligibility requirement for a HECM for Purchase loan is that at least one borrower needs to be 62 or older. Qualifying for the loan, while more flexible than a traditional loan application, requires a financial assessment, says Weinstein.
“There’s no credit score requirement, but borrowers have to show they have a required residual income to prove their income exceeds their debt,” says Weinstein. “It depends on the size of the household and the region of the country, but it ranges from $550 to $1,300.”
Some of the other details of the HECM for Purchase program include: 1) the home must be the primary residence; 2) borrowers and their heirs are never required to pay a balance, even if the loan exceeds the home value and 3) no principal and interest payments are required, although borrowers can make payments if they want to increase their equity.
Bruser worked with a couple from Michigan who wanted to retire in Florida.
“They needed to make a 50 percent down payment, which they had in cash, so they ended up keeping their Michigan home as a second home near their family and didn’t need to sell it to get into their retirement home,” says Bruser. “In another case, a couple was able to buy a bigger new home on a better lot with all the options they wanted and still keep some of the cash from the sale of their previous home.”
Clients Can Buy a New-Construction Home with HECM for Purchase Loans
Until recently, this loan program required borrowers to wait until a Certificate of Occupancy (CO) was issued for a property to apply for the loan. Now, HUD allows loan applications to begin as soon as the home is under contract.
“This is a gamechanger for builders, particularly larger ones, who are used to closing on a loan the day a house gets its CO,” says Cooper. “The delay in the loan application meant that builders had to carry the costs for that house, often for an extra 30 days. Now this loan program is like any other.”
Other new rules benefit consumers, too, including the reduction of fees for upfront mortgage insurance from 2.5 percent to 2 percent and an even larger reduction of annual mortgage insurance from 1.25 percent to 0.5 percent.
The interest rates charged for these loans is also lower than in the past and more in line with traditional mortgages, says Bruser.
Client Fears of HECM for Purchase to Consider
When you’re introducing this program to buyers, you need to eliminate their fears, says Cooper, which usually center around losing their home or not leaving the house to their kids. HUD rules protect spouses so that even if the spouse was younger than 62 when the HECM for Purchase loan was approved, spouses must be allowed to stay in the property if they want.
Unmarried borrowers are also protected if they were both over 62 when the loan was closed. The only time a partner isn’t protected is if they are unmarried and were younger than 62 when the loan started.
“I remind people that their kids usually don’t want their house, so if they want to leave a legacy they may as well keep their cash for them,” says Cooper. “They’ll get any equity leftover after the house is sold and the loan is repaid, too.”
Only about 60,000 reverse mortgage loans, both traditional ones and those for purchase, are issued each year. Weinstein thinks that will change with the new rules, since they reduce insurance costs and mean that homeowners are more likely to have home equity available when the loan must be repaid.
“It’s statistically more likely that there will be equity leftover when the loan is repaid compared to earlier versions of this program,” says Weinstein.
For a free downloadable information kit for real estate agents from the National Reverse Mortgage Lenders Association, visit their tool kit.