The new Home Equity Conversion Mortgage (HECM) lets seniors use a reverse mortgage to pay for the purchase of a home or condo. Many are taking advantage of this to get a purchase mortgage and then downsize into affordable homes.

Thanks to new provisions that were added as part of the 2008 Housing and Economic Recovery Act, it's now possible to take advantage of a reverse mortgage program and use it as a purchase mortgage. The introduction of the HECM was part of several financial incentives and stimulus ideas passed by Congress late last year in response to the collapse of the economy and paralysis in the credit markets.

HECM for purchase mortgage

The HECM program is administered by the Federal Housing Administration (FHA). It will make it easy for most people who already qualify for a reverse mortgage to use it to create a purchase mortgage arrangement. HECM allows those who qualify to make a large cash down payment on a home or condo, and use the reverse mortgage as permanent financing for the rest of the home's price.

The loans are called reverse mortgages because, rather than the homeowner paying the lender, the lender pays the homeowner. With typical reverse mortgages, the equity is paid out in cash; but with the HECM, the lender makes the mortgage payments instead. There are certain requirements to qualify: Buyers need to be at least 62 years of age; the property being purchased must be a principal residence and owner-occupied; the program only covers homes appraised up to $625,500; and the down payment must be substantial-usually 40 to 50 percent of the sales price. The size of the down payment depends upon the age of the buyer and the interest rate of the loan. The older the borrower or the lower the interest rate, the less the down payment needs to be.

Making the reverse mortgage work for you

Here's how it works: A senior buys a home by making a hefty down payment, but no actual monthly mortgage payments are necessary. As a non-recourse loan, the borrowing senior will never owe more than the value of the property. He will owe the amount borrowed plus accrued interest and insurance. But if the house loses value, the lender has to incur the loss-not the owner or his heirs. If the house appreciates in value beyond the cost of repayment, then the homeowner or his heirs receive the leftover profits.

A buyer between the age of 62 and 65, for example, can use a HECM for more than half of the purchase price at today's mortgage rates. He could buy a $250,000 home and have to pay only about $120,000 as a down payment, plus closing costs. Never again would he need to make a house payment.

Many seniors are downsizing with a HECM by selling a home, using some of the proceeds as their reverse mortgage down payment, and then pocketing the rest to fund retirement or spend on whatever they like.

Published on May 23, 2009