Senior Home Buyers Allowed To Use Reverse Mortgage

Beginning Jan. 1, home buyers 62 and older will be able to buy a house using a reverse mortgage, as long as it's their primary residence.

Traditionally, people obtained reverse mortgages to take equity out of their existing homes to help them meet expenses, pay off the mortgage or pay the property taxes.

But staff members at the Federal Housing Administration noticed an increasing number of seniors selling their homes, buying new homes and then getting a reverse mortgage to pay off the new home, said Meg Burns, director, FHA office of single-family program development.

"They were going through two mortgage transactions and paying all those fees," she said. "Seniors need to keep their money in their pocket."
When the FHA staff members looked further, they found that the traditional reverse mortgage program designed to keep seniors in their home wasn't helping those who wanted to downsize, move to a house without stairs, move closer to their kids or move into active adult housing.

Burns said a program allowing a Home Equity Conversion Mortgage for purchase "came from us internally" as a way to accommodate that kind of consumer.

Fannie Mae launched a reverse mortgage program for purchase in 1997 called a Home Keeper for Home Purchase, but Burns said it was not used much because of borrowing limits.

With a reverse mortgage, the borrower takes the equity out of the home either as a lump sum, a line of credit, in a monthly payment or as a combination of these. The loan is repaid when the borrower sells the house or the last homeowner dies or moves out. The amount of the loan is based on the home's value and the youngest borrower's age.

A Cap On Fees
A new law that went into effect this fall imposed a $6,000 cap on origination fees, and that law applies to the HECM for purchase loan. Lenders can charge 2 percent of the first $200,000 of loan value plus 1 percent of any additional loan value. Consumers are still charged 2 percent for FHA insurance.

The FHA insurance protects both the borrower and the lender. If the bank should go under, consumers still will receive their reverse mortgage. And if the home's value drops below the original loan amount when the senior dies or moves out, the insurance protects the lender.

Consumers should expect to pay fees similar to a traditional reverse mortgage, with the additional fees relating to a purchase of a home such as recording fees and transfer taxes. Borrowers are still required to meet with a third-party, HUD-approved consumer counselor so they understand their options.

Those using a HECM loan for purchase must buy a one- to four-family house. The HECM for purchase may be used for new construction that has been completed and received a certificate of occupancy. Purchasers must move in within 60 days of closing.

"We talk to seniors. The folks we've talked to agree that it makes sense," Burns said. "I feel like this product is going to address a social issue for them."