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Home Equity Conversion Mortgage for Purchases

[Apr 14, 2009.]


Seniors are just now starting to close on  Home Equity Conversion Mortgages (HECM) for Purchase, a form of federally insured reverse mortgage authorized in the Housing and Economic Recovery Act of 2008. The law took effect Jan. 1, 2009.

The Home Equity Conversion Mortgage for Purchase is a terrific tool for seniors looking to downsize without ever having to make another mortgage payment.

Traditionally, reverse mortgages were used by older homeowners to tap their home equity to either provide income in their later years or to help eliminate their mortgage payment.

One of the primary benefits of a HECM for Purchase is the buyer does not need to meet traditional underwriting guidelines. Income, employment, and credit history are not factored into the process which may make it attractive to some seniors that have seen their income drop or have faced credit challenges.

There are some requirements that need to be met.

  1. Individuals and couples must be at least 62.

  2. Borrowers must occupy the property as their principal residence within 60 days of closing.

  3. Only existing single-family homes, condos, manufactured homes and 2-4 unit properties valued at less than $625,500 are eligible.

  4. Down payment must come from savings, retirement accounts and/or proceeds from liquidation of personal property or sale of current home.

There are a couple of downsides to the Home Equity Conversion Mortgage for Purchase. First, the buyer needs to put down a sizable down payment - often times at least double what would normally be required when buying a property. The size of the down payment varies depending on the age of the buyer and the interest rate of the loan.

The HECM can also be expensive with regards to fees. In addition to normal closing costs associated with buying a property, buyers must pay 2 percent of the property's appraised value - up to the maximum value of $625,500 - as a premium for federal mortgage insurance.


About Author:

Chris Rocks is the Regional Director of the National Credit Federation (NCF), a consumer advocacy group that assists small business owners and consumers overcome debt and credit challenges.

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