A Reverse Mortgage, in many ways, can be a valuable tool to purchasing a retirement home.
Retirees work all of their lives to get to the point of relaxing and enjoying retirement years, which often includes buying a home to live in without a payment as they “age in place”.
Many do not know that seniors 62 or older can use a Reverse Mortgage to purchase a home during retirement, yes purchase! Many people that have heard of reverse mortgages only think of them as a way of getting cash out as a refinance, but it now allows for senior citizens to purchase a primary residence so that they can enjoy retirement with no mortgage payment. Of course, Reverse Mortgages are not the only financing option for seniors to purchase as retirees are able to use any mortgage just as any other buyer would.
When planning a retirement and considering the purchase of a new home, a buyer should ask themselves questions such as…
1) Will living at home work for me? 2) What resources do I have to help me stay at home? 3) How long can I continue to live at home? Everyone’s situation is different and that is why the borrowers, any advisors, family members, our reverse lending loan officers, and the counselor will discuss options in detail to ensure the best choice is made.
So if you are a retired borrower looking to purchase a home, we would be happy to go over a Reverse Mortgageand the other options with you. The big question we will address today is…
Why Should You Consider a Reverse Mortgage on a Retirement Home Purchase?
- There is no payment required on the mortgage
- Borrowers can stay in the house as long as they live
- Way to preserve investment and/or savings accounts
- Increases a borrower’s monthly cash flow
- Can be a valuable tax planning tool (by having no payment, seniors may not have to draw extra funds from a 401k or Traditional IRA which could create income taxes to pay)
- Afford the house you want or need.
Let’s give an example of a common purchase scenario & how a Reverse Mortgage can save the day:
A retired, married couple that are 76 and 72 years old have $200,000 from the sale of a prior home to put towards purchasing a retirement home. They both receive social security which is not taxed and have a traditional IRA account which they could access as a lump sum or as income if needed.
Buyers’ Goals: The couple wants to move to North Carolina, live in a community that is in close proximity to healthcare and has many activities for them, spend $200,000 on a house (using their savings which is from selling their prior home), and have no house payment.
The problem: The couple finds the perfect neighborhood, the right house overlooking a golf course with a one-level floor plan, and the fly in the ointment is it costs $300,000! So they really start thinking “Well, if we start a distribution from our IRA, we can make the payments on a $100,000 mortgage or maybe we just need to lower our expectations on a house”.
Here’s a Solution to Consider: This is where a Reverse Mortgage could help out by the buyers…
- Only needing to put down about $122,700 plus closing costs (72 year old could borrow .591% of the purchase price
- Still having a good amount in their savings account
- Having no monthly mortgage payment
- Preserving their IRA account (saves a taxable event)
- Being able to move into the house they really, really want!
Helpful Tips to Know When Using a Reverse Mortgage on a Purchase
- There can be no escrow holdbacks for repairs (all required repairs must be completed prior toclosing)
- Seller may not pay any of the buyer’s closing costs or pre-paids
- Buyers may own other properties but must have sufficient income for such
- Credit qualifications and restrictions to purchase if borrowers had a foreclosure or short sale within the last 3 years
- Buyer would need to bring the required equity plus the closing costs to closing
- If new construction, the loan application CANNOT be taken until after the Certificate of Occupancy has been issued on the house
- Buyers may take the required counseling before or after contract (counseling is good for 6 months)
- There are a few extra forms required along with the purchase contract (we provide these)
We hope that you find this article helpful and we are happy to sit down with retirees to determine if a Reverse Mortgage is the right solution for you.