The FHA’s HECM for Purchase program is designed to help seniors purchase a new primary residence. It may double their purchasing power, minimize their down payment, and eliminates required monthly mortgage payments.
Yes, a HECM (Home Equity Conversion Mortgage) is a reverse mortgage, but unlike their common uses (e.g. to refinance a home or make ends meet) a growing number of seniors are using them to purchase a home. They may want to downsize, move closer to family or find a more suitable home. HECMs allow borrowers to stay in their homes until they pass, they no longer maintain it as their principal place of residence or it is sold.
So how do they work?
First, a HECM for Purchase program has nothing to do with the present home; it only pertains to the one being bought.
Let’s assume you are selling your home and buying another for $250,000. Based on your age, the program selected and its interest rate, you qualify for a certain percent of the home’s value, ranging from about 52% to 60%.
| HECM of Purchase Example | |
| Purchase (Appraised Value) | $250,000 |
| Qualifying Percent | 55.0% |
| Initial Amount of HECM | $137,500 |
| Less: | |
| Mortgage Insurance Premium | $(1,250) |
| Origination Fee | $(2,500) |
| Estimated Closing Costs | $(1,750) |
| Net Proceeds from HECM | $132,000 |
| Purchase Price | $250,000 |
| Net Proceeds from HECM | $(132,000) |
| Required Down Payment | $118,000 |
As shown, the qualifying percent used is 55%, and the HECM would be $137,500. After the Mortgage Insurance Premium* and customary closing costs, you would have net proceeds of $132,000, and would need a cash down payment of $118,000, usually from the sale of your present home.
* (Mortgage Insurance Premium is charged because HECM loans are federally-insured, which guarantees that neither you nor your heirs, will ever owe more than the home’s value at the time it is sold).
Example #1
A couple is selling the home to downsize and move closer to their children.
As shown, if they buy their new home using most of proceeds from the sale of their existing home ($250,000), they are left with $70,000 cash.
If they chose a HECM for Purchase, they would reduce their cash down payment to $118,000 and have $202,000 in cash.
| Example # 1 | |
| Net Proceeds from Sale of Home | $320,000 |
| Purchase Price of New Home in cash | $(250,000) |
| Remaining Cash | $70,000 |
| Alternative using a HECM | |
| Purchase Price of New Home | $250,000 |
| Net Proceeds from HECM | $(132,000) |
| Down Payment | $118,000 |
| Remaining Cash | $202,000 |
Example #2
A couple does not have sufficient cash to purchase a home and cannot qualify for a mortgage. They also may want cash reserves to supplement their retirement benefits.
As shown, the couple sells their existing home providing net proceeds of $175,000, but want to buy a more updated home for $210,000 – they are short ($35,000).
If they chose a HECM for Purchase, they would only need $100,000 for the down payment and would then have $75,000 in cash for living expenses and emergencies.
| Example # 2 | |
| Net Proceeds from Sale of Home | $175,000 |
| Purchase Price of New Home in cash | $(210,000) |
| Cash Shortage | $(35,000) |
| Alternative using a HECM | |
| Purchase Price of New Home | $210,000 |
| Net Proceeds from HECM | $(110,000) |
| Down Payment | $100,000 |
| Remaining Cash | $75,000 |
With a HECM of Purchase, there are no credit or income requirements. The borrowers must occupy the home as their principal place of residence for at least 6 months/year, pay their property taxes and homeowner’s insurance, maintain the home, and must attend independent counseling.
As with any major decision, it is recommended that the borrowers consult with their financial planner, attorney and family members.