If you are 62 years or older, the Home Equity Conversion Mortgage (HECM) Lifestyle Loan can help you buy your next home without required out of pocket monthly mortgage payments after closing. The HECM Lifeystle Purchase is a Federal Housing Administration (FHA) insured home loan that allows seniors to use the equity from the sale of a previous residence to buy their next primary home in one transaction or use funds from savings, etc...
The HECM Lifestyle for purchase program is unlike regular traditional mortgages as the monthly mortgage interest payment is not paid out of pocket each month like the customary mortgage, instead the interest is accrued and added to the principal balance each month.
In addition, the principal balance is generally not due until the sale of the property by the owner or the death of the final senior on title. Regardless of how long you live in the home or what happens to your home’s value, you only make one, initial investment (down payment) towards the purchase. The lender may only look to the value of the home for repayment; no other assets may be attached if the loan balance grows beyond the mortgaged home value (this is therefore a non-recourse loan).
Although there are several benefits to the loan, including: (1) Elimination of out-of-pocket monthly mortgage payments (2) Increase in your purchasing power and, (3) preserving your cash; there are many factors to consider before deciding whether the HECM is right for you. To aid in this process, you must meet with three (3) parties, a HECM Realtor who is certified for the program, a HECM loan officer to process the loan and a HECM Counselor.
STEP 1. Get a free consultation from a certified HECM Realtor to help you review your goals and objectives and assist you in determining your real estate financial needs; a seasoned Realtor to help you review the various alternatives available to you.
STEP 2. Sit with a HECM Lifestyle loan officer to see if you qualify (Ask your Realtor for a referral). The lender will discuss other requirements of the HECM program, such as first year payment limitations, the loan approval process, and repayment terms. There are borrower and property eligibility requirements that must be met and other criteria. You can use the prelimary listing below (Borrower Requirements) as a guide but only the loan officer can determine if you could qualify.
STEP 3. If interested in going further with the HECM program, sit with a HECM counselor approved by the Department of Housing and Urban Development (FHA). The counselor will review the program in detail to make sure you have an understanding of the program eligibility requirements, financial implications, and alternatives to obtaining a HECM and repaying the loan. Counselors will also discuss provisions for the mortgage becoming due and payable. You can search online for a HECM counselor or call their (800) toll-free number.
STEP 4. Upon the completion of HECM counseling, you should be able to make an independent, informed decision of whether this product will meet your specific needs. If you meet the eligibility criteria and have passed the HECM counselor test, you can then complete a mortgage application with the loan officer. This consultation must take place before loan application.
Borrower Requirements
You must:
Ø Be 62 years of age or older
Ø Meet the down-payment requirements, The amount required varies with age, interest rate and other factors.
Ø Occupy the property as your principal residence
Ø Not be delinquent on any federal debt
Ø Have financial resources to continue to make timely payment of ongoing property charges such as property taxes, insurance, and Homeowner Association fees, etc.
Ø Participate in a consumer information session given by a HUD- approved HECM counselor
Property Requirements:
Ø The following eligible property types must meet all FHA property standards and flood requirements:
Ø Single family home or 2–4-unit home with one unit occupied by the borrower
Ø HUD-approved condominium project
Ø Individual Condominium Units that meet FHA Single Unit Approved requirements
Ø Manufactured home that meets FHA requirements
Financial Requirements:
Ø Income, assets, monthly living expenses, and credit history will be verified (No FICO Score Required)
Ø Timely payment of real estate taxes, hazard and flood insurance premiums will be verified
Mortgage Amount Based On
The amount you may be approved for will depend on:
Ø Age of the youngest borrower or eligible non-borrowing spouse
Ø Current interest rate; and
Ø Lesser of:
· appraised value;
· the HECM FHA mortgage limit 1,048,825; or the sales price
If there is more than one borrower and no eligible non-borrowing spouse, the age of the youngest borrower is used to determine the amount you can borrow.
Why Consider A HECM For Purchase Loan
Home costs represent the largest expense for retirees, hitting 36% of their annual expenses. Retirees may want to consider several options open to them as house prices remain high.
Ø No Out-of-Pocket Mortgage payment
Ø Right-size to a smaller, lower maintenance home in the same or less expensive market
Ø Help buy or purchase individually a multi-generational home (family members living jointly but separately in one home or complex), or investment property
Ø Obtain more purchasing power or free up other financial savings
Ø Buy a home closer to family or friends
Ø Move to more energy efficient home or safer neighborhood
Ø Seek out cooperative living situations with other retired couples
Ø Lower their cost of living during retirement
Ø Enjoy carefree living in a senior housing community
Despite the benefits, there are several risks associated with reverse mortgages. One of the most significant risks is the potential for erosion of the homeowner’s equity as the interest and fee payments are added to the loan balance and the balance is increasing over time. Even though the market value of the home may also increase over time as well, the net result could leave less equity for homeowners to pass on to their heirs. Yet take note that if you are presently making a mortgage payment, those funds are freed up to help your family now.
Another issue is, even though the lender cannot foreclose if the rising loan balance exceeds the home market value (non-recourse loan), foreclosure is possible if the homeowner fails to meet the loan’s requirements. That is, fails to keep up with property taxes, insurances, homeowner’s association fees and home maintenance- not the mortgage payment since it is not out-of-pocket. Plan the financial strategy to avoid this potential.
In addition, the mortgage can be complex and difficult to understand. Without proper guidance, homeowners may not fully comprehend the loan terms and conditions and could end up making decisions that are not in their best interest. Consultation addressing the loan is required before loan application.
Therefore, before deciding to pursue an FHA HECM Lifestyle mortgage, it is crucial for homeowners to understand the product fully and consider all alternatives. Consulting with a reputable HECM certified Realtor, a HECM counselor and HECM FHA lender is key to making an informed decision.
One should note that we are living longer and most seniors want to age in place. We also see that 70% of Americans will need long-term care and only 2% have long-term care insurance. The HECM supports these issues we face and is a positive assist with our financial stability.
Upfront disclaimer: The loans must be repaid after death or a move-out and are not a “government benefit” or “risk free.”