If you’re 62 years or older and are looking to move, a Home Equity Conversion Mortgage (HECM) for Purchase could help you pay for your new home. An HECM for Purchase is a government-insured reverse mortgage that you can put toward buying a house. With an HECM for Purchase, you won’t have to make mortgage payments as long as you keep up with property taxes and other obligations. However, this type of reverse mortgage can come with high closing costs and insurance premiums, so it may not be your most affordable option for financing a home. Read on for the full story of the HECM for Purchase program, along with its pros and cons.
What Is an HECM?
An HECM for Purchase is a type of HECM, which is in turn a type of reverse mortgage — specifically, the kind that is insured by the Federal Housing Administration (FHA). HECMs allow people 62 and older to convert the equity in their home into cash. (The chief HECM vs. reverse mortgage differentiator is the FHA’s involvement in HECMs.)
You’ll need to own your property outright or have a good amount of equity built up to qualify for an HECM. Eligible borrowers can turn that equity into cash and won’t have to pay back the home mortgage loan until they move, sell the home, or die. In those events, the HECM must be paid back in its entirety, along with any interest charges. An HECM has some of the same pros and cons of reverse mortgages.
First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.
What Is an HECM for Purchase?
An HECM for Purchase is a type of HECM that allows homeowners to borrow against their current residence and pay for a new one in one transaction with one set of closing costs. It’s designed for homeowners who are looking to move into a new primary residence. You can’t use an HECM for Purchase to finance a vacation home or an investment property.
Like other HECMs, an HECM for Purchase does not require repayment during the borrower’s lifetime while they (or their surviving spouse) are living in the house. However, borrowers can pay down the loan’s principal and interest if they choose. They also must meet other payment obligations, including property taxes, homeowners insurance, and maintenance costs.
The HECM for Purchase will become due if the borrower moves or dies. As a non-recourse loan, however, the HECM for Purchase will never charge more than the value of the home it was used to finance.
HECM for Purchase Requirements
There are several requirements you’ll need to meet to qualify for an HECM for Purchase. Here are the main ones.
Age Requirement (62+)
HECM for Purchase loans are exclusively offered to borrowers who are age 62 or older. By contrast, traditional mortgages don’t have an age restriction, apart from the age of majority in your state (typically at least 18).
Income and Credit Qualifications
You’ll also need to meet income and credit requirements to qualify for an HECM for Purchase. While there’s no stated minimum credit score, having debts in delinquency or default could be an obstacle to qualifying.
Lenders also consider your residual income, or the amount of income you have after subtracting certain expenses. You’ll need to show that you have sufficient residual income to keep up with living expenses.
Financial Assessment
A lender will also assess your overall finances to ensure you can meet the financial obligations of the HECM for Purchase loan, which include paying property taxes and homeowners insurance. Plus, you’ll need to make a sufficient down payment on the new property, typically around 50%.
How HECM for Purchase Works
An HECM for Purchase lets you draw on the equity of your current home to finance the purchase of your next home. It combines two transactions — a reverse mortgage and a new mortgage — into one to simplify the home purchase process.
You won’t have to make payments on your HECM for Purchase while you live in your house, but you will have to keep up with payments of property taxes, homeowners insurance, maintenance expenses, and any homeowners association fees.
HECM for Purchase loans are backed by the FHA, so you’ll need to work with a lender that specializes in these loans to get one.
Down Payment Amount
To use an HECM for Purchase, you’ll need to sell your original home and use the proceeds to make a sufficient down payment on your new home. Then you can finance the remaining amount with your HECM loan. The required down payment may range from 45% to 62% of the home’s purchase price, depending on the borrower’s and spouse’s age. If you have money left over after making the down payment, you can receive it as a lump sum or as fixed monthly payments.
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Pros of HECM for Purchase
There are several benefits to taking out an HECM for Purchase loan.
• No mortgage payments: With an HECM reverse mortgage for purchase loan, you won’t have to make principal and interest payments while you live in the house and cover essential charges, like taxes. A conventional mortgage, by contrast, requires monthly repayment.
• More purchasing power: An HECM for Mortgage could increase your purchasing power and bring your goal of buying a new home within reach, especially if you’ve built up a good deal of equity in your current property.
• Avoid dipping into savings: By using an HECM for Purchase to buy a home rather exhausting your savings, you can avoid draining your retirement funds or other accounts to buy a house.
• Debt won’t exceed home value: As noted above, an HECM for Purchase is a non-recourse loan, so the debt you or your heirs owe will never exceed the home’s value, even if the property value dips in the future.
Cons of HECM for Purchase
At the same time, an HECM for Purchase loan has some downsides to consider before you borrow.
• Charges interest, closing costs, and premiums: The HECM for Purchase can come with high closing costs, which include origination fees, title insurance, and appraisal fees. It also charges annual Mortgage Insurance Premiums and accrues interest based on the reverse mortgage interest rate you’re given at the outset of the loan.
• Requires you to pay property taxes and other expenses: You’ll need to pay property taxes and homeowners insurance to keep the loan in deferred repayment, as well as maintain the property to acceptable standards.
• Demands that you live in the new home full-time: Your home must be your new primary residence. If you move or sell, you’ll have to pay back the HECM for Purchase loan.
• Calls for a large down payment: This loan program is reserved for borrowers who can make a large down payment, sometimes 50% or higher, for their new home.
Alternatives to Consider
Before applying for an HECM for Purchase, it’s worth considering alternative financing options, such as:
• Traditional mortgage: A conventional mortgage typically requires a credit score of at least 620, a down payment (though not as high as 50%), and a debt-to-income ratio below 50% — and sometimes as low as 43%. You’ll also need to have sufficient income to qualify.
• Home equity loan or home equity line of credit (HELOC): Homeowners can also tap into their equity with a home equity loan or HELOC. You could use this “second mortgage” to finance another home, but be cautious about over-borrowing. A lender can foreclose on your home if you miss payments.
• Proceeds from home sale: Selling your home is another way to finance the purchase of a new one, especially if you’re downsizing to a more affordable place. In this case, you might have extra money left over to put into savings or invest.
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The Takeaway
The HECM for Purchase program can simplify the home-buying process for seniors who want to use a reverse mortgage to buy a new house. As long as you keep up with property taxes, homeowners insurance, and other required costs, you won’t have to make any mortgage payments on your HECM while you reside in your new home. At the same time, HECM for Purchase loans come with closing costs and premiums. Consider all your options to determine the best type of financing for your next home purchase.
Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.
FAQ
What types of homes qualify for HECM for Purchase?
The following types of homes qualify for the HECM for Purchase program:
• Single-family homes
• 2- to 4-unit homes where the borrower occupies one unit
• HUD-approved condo projects
• Individual condo units that meet FHA single-unit approved requirements
• Manufactured homes that meet FHA requirements
The property must also meet all of the FHA’s property standards and flood requirements.
How long can I stay in the home with HECM for Purchase?
You can stay in the home you finance with an HECM for Purchase loan indefinitely. The loan will become due when the last borrower (or the borrower’s spouse) moves, sells the home, or passes away.
Are there limits on HECM for Purchase loan amounts?
An HECM for Purchase is limited to the appraised value of the home or the sales price of the new home, whichever is lower. It cannot exceed the HECM FHA mortgage limit, which is $1,149,825 for 2024.
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