Wouldn't it be nice to buy a home without having to make mortgage payments?

Senior citizens can now do just that, thanks to a new wrinkle in federal housing law that allows them to purchase a new home using a reverse mortgage. Qualified buyers who can put up a substantial portion down payment can finance the rest using a reverse mortgage, and live mortgage-free the rest of their lives.

Reverse mortgages have been popular for a number of years as a way for seniors to tap the equity in their homes without selling them. Under the Housing and Economic Recovery Act of 2008, seniors can now use a reverse mortgage - referred to as a Home Equity Conversion Mortgage (HECM) - to actually finance the purchase of a new home, as of Jan. 1, 2009.

An alternative to traditional financing

The new option works exactly like a traditional HECM reverse mortgage, said said Larry Benton, a mortgage consultant and Certified Senior Advisor with 1st Metropolitan Mortgage in Annapolis, Md. The difference is that it allows seniors to tap their equity in their home to avoid mortgage payments instead of using it to provide a monthly revenue stream.

He said it offers an attractive alternative to traditional options for seniors purchasing a new home. "Seniors today face a challenge getting financing," Benton said. "Particularly in today's market, it's very difficult."

How it works

The concept is admittedly confusing at first - how can one use a reverse mortgage to buy a house one doesn't own yet? But it's actually fairly straightforward: instead of making mortgage payments, the borrower is essentially granting the lender a gradually increasing share of the money represented by the down payment. In that sense, it's the same as in a traditional reverse mortgage, except that you're starting out with a portion of the value of the home, rather than 100 percent of the home's value.

For example, suppose a senior couple in Minnesota want to sell their home and move to Arizona. Their Minnesota house is valued at $200,000, but the condo they want to buy in Arizona costs $300,000. Previously, their only option would be to sell the Minnesota house and get a new mortgage for the remaining $100,000. For seniors on a limited income, qualifying for and making the payments on such a mortgage could be a serious obstacle.

With a reverse mortgage to purchase, they might be able to put up $140,000 from the sale of the Minneapolis property as a down payment, cover the rest with a $160,000 reverse mortgage, pocket the remaining $60,000 from the sale of their original home and live mortgage-free for the rest of their lives. Instead of mortgage payments, the lender gradually gains an increasing stake in the $140,000 represented by the down payment, to be paid at whatever time the home is eventually vacated and sold.

The couple still owns the home outright and they or their estate can still profit from any increase in the value of the home when it is eventually vacated and sold. The lender pays a small premium to the FHA as insurance against a possible decline in the home's value.

Eligibility and availability

The program is available to seniors age 62 and above. The amount available to be funded through a reverse mortgage depends on a formula based on the borrower's age and the purchase price of the home - older borrowers can qualify for a larger reverse mortgage than younger ones.

The new reverse mortgage is available for making home purchases in most areas, although certain legal obstacles remain in Texas and Massachusetts, said John Yedinak, editor of the ReverseMortgageDaily online news service. Most HECM lenders are offering the new financing, he said, although some are awaiting further guidance from HUD before proceeding.

"It is available," Yedinak said. "However, you're not seeing as many lenders offering it because they're just being cautious."

Housing slump an issue

One wrinkle in the program is the sharp decline in housing prices in recent months, reducing the amount of a down payment seniors might be able to fund through the sale of an existing home. Yedinak said this has particularly been an issue in places like Florida and California, where the decline in housing prices has been most severe.

"A lot of people who would've qualified six months ago can't even qualify now," Yedinak said. For more information, contact a certified HECM counselor. Additional information on HECM reverse mortgages, including where to find certified counselors, is available from HUD.

Published on March 30, 2009