Oct 30, 2019
As more and more Baby Boomers reach retirement age, there is an increasing demand for single-story homes with finance options such as the HECM for Purchase Program (H4P). With the H4P Program, you can purchase a $350,000 home for around $220,000 and never have a monthly mortgage payment, if you or your spouse are 62 years old! If one of you is 70, you can buy that home for around $200,000.
Many retirees want a smaller single-story home close to family and friends and amenities like walking paths and a community clubhouse. In order to secure the home of their dreams, retirees would traditionally pay cash from the sale of another home or secure a traditional mortgage. The drawback of these two options is the amount of money required, which can put stress on available funds needed for paying bills or emergencies.
If you pay cash for your new home or have a traditional mortgage and then later need to solve cash flow issues, your options include securing a traditional line of credit or a Home Equity Conversion Mortgage (HECM) refinance. However, the line of credit option requires making additional monthly payments and both options create another round of closing costs.
The H4P Program fixes these problems with a single transaction, meaning a significant portion of your nest-egg is preserved by not having to go all in with a cash purchase. Your monthly cash flow is essentially freed up by not having a monthly mortgage payment. To date, the H4P Program is the only mortgage that uses age as a preliminary qualifying factor. So, if you’re at least 62 and can qualify for the HECM for Purchase Program, this is one time it pays to be older. Smile and celebrate your retirement years!
The H4P Program is unlike a traditional home mortgage in that monthly payments are deferred and the loan balance increases over time. However, there is a consumer safeguard built into the program. Because the loan is insured by the FHA (Federal Housing Administration), neither you nor your heirs have any personal liability for the repayment of the debt.
If you use the H4P Program to purchase your dream home and decide to move in 10 years. When you sell your home, you’ll receive 100% of the net proceeds after paying off the loan balance at the time of sale, which is exactly how a traditional mortgage works. So the primary benefit to you is that you don’t tie up all your savings by paying cash and you increase your monthly cash flow by not having a monthly mortgage payment. Also, if your home has increased in value greater than the mortgage balance when you sell it, you participate in the equity growth.
But what happens if you sell your home during a market downturn and the loan balance is greater than the current market value of your home? In a traditional mortgage scenario you or your estate would be forced to sell the home at a loss and cover the negative balance owed. The FHA non-recourse clause governing the H4P Program states that the home is the only asset securing the loan. That means neither you nor your estate have any personal liability for a deficient loan balance if your home is sold for a loss.
Simply put, it’s not your problem and no one is coming after your estate for a settlement. In addition, if your heirs wanted to retain ownership of the home after your death, they can do so by paying off the lesser of the reverse mortgage balance or 95% of the appraised value of the home.
If you end up in a nursing home, or you pass away, then it’s time for your heirs to get the house appraised and see if there is enough equity remaining for them to realize a profit from the sale. If not, they can simply sign the deed over to the lender and not have to deal with it.
With the H4P Program, you can live in your home until the last borrower vacates as long as loan terms are met. The borrower/s must occupy the home as their primary residence and remain current on property taxes, homeowner’s insurance, the costs of home maintenance, and any HOA fees.
Use the resources below to learn more about the details of the HECM for Purchase Program, including qualifying rules, down payment, disqualifying factors, personal liability, homeowner responsibilities, consumer safeguards and more.
By the time you finish reading this guide you will know the following:
Due to the unpredictability of the housing market, you are encouraged to consult a financial planner prior to making a decision that could affect your retirement plan. The reverse mortgage is not a time-sensitive product.