A home equity conversion mortgage (HECM) for purchase loan allows borrowers to purchase a new home with a reverse mortgage loan. That means with a HECM for purchase you can complete both the purchase and reverse mortgage transactions with a single set of closing costs. 

How does a HECM for purchase work?

The HECM for purchase gives borrowers access to home-buying funds, often without requiring they tap into savings.  

With a HECM for purchase, the borrower combines the proceeds of the sale of their current home or other assets with a reverse mortgage to fund the purchase of a new home. As with a traditional HECM, the borrower can live in the new home without the obligation of monthly mortgage payments.

Although they do not have required monthly mortgage payments, the HECM for purchase borrower does have other loan obligations to uphold to keep their loan in good standing. These  include living in the property as their principal residence and paying property charges, including property taxes, fees, and hazard insurance. The borrower must also maintain the home. If the borrower fails to comply with these terms, then the loan will need to be repaid. The loan must be also repaid in the event borrower leaves or sells the home.

Eligibility requirements of a HECM for purchase  

The requirements for a HECM for purchase are the same as a regular HECM. Borrowers do not need to have owned a home in the past to be eligible for a HECM for purchase. First-time homeowners who are able to fund a down payment and meet the other eligibility requirements can also get this type of loan.  

What makes a HECM for purchase a good fit for retirees? 

Retirees may find a HECM for purchase is an easier route to buying a new home than a traditional mortgage. Especially those borrowers who can no longer report a regular income on their loan application.

Along with offering the equity tapping potential of a reverse mortgage, a HECM for purchase makes it possible for people to choose a home more suited to their needs than their current one.

Borrowers with evolving health concerns may find a single-story house will be a better fit than their current two-story.  Or perhaps, it makes sense to live closer to family and friends, and a HECM for purchase offers the option to essentially trade a present home for a similarly priced home in another location. 

With the flexibility a HECM for purchase offers, upgrades, and downgrades can also become attractive possibilities. Borrowers who’ve been eyeing addresses in plum locations like the beach or a golf course may be able at last to purchase their dream home without cashing in retirement savings.  

Conversely, after children have left home, some borrowers may feel overburdened by too much house to clean and care for, not to mention feeling the equity built up in their home could be better used elsewhere. By downsizing, borrowers can reduce more than cleaning and maintenance needs; with the proceeds from the old home, they gain options for using their money.  

Down payments and funding sources 

Purchasing a home with HECM requires the borrower to make a sizeable downpayment considered an equity contribution toward the home’s purchase. The following restrictions apply to the source of the down payment funds: 

• The borrower may only use their own money or money obtained from the sale of a previous home. 
• Withdrawal from a borrower’s savings or money gifted to them by a family member is acceptable. 
• Borrowed money in the form of bank financing or borrowed from a family member is not permissible. 
• Borrowing against an asset such as a CD or life insurance policy is not permissible. 
• Lenders are required to verify the source of funds. 

Typically, the older you are, the more loan proceeds you are eligible to receive from a HECM for purchase. 

Can you use a HECM for purchase on new construction? 

A HECM for purchase cannot be used to fund the construction of a new home or purchase of property to build on. However, newly built homes are eligible for a HECM for purchase. Before a borrower files a HECM for purchase application, the home must be 100% complete and the final certificate of occupancy filed with the appropriate governmental agency as determined by your state.

A HECM for purchase can be a powerful tool that allows a borrower to buy a new home. As with all significant financial decisions, it is wise to consult with a financial professional before embarking on any major financial commitment.