The majority of people who should be asking ‘what is a reverse mortgage?’ are those approaching retirement, but are not quite there yet. Put simply, a reverse mortgage allows you to borrow money using the existing equity in your home as security.
Q. I wish to purchase a new home for approximately $800,000. What is the difference if I:
(A) Pay cash for the property and then get a $250,000 reverse mortgage or
(B) Get a $250,000 reverse mortgage and a regular mortgage of $550,000 for the remaining balance?
I am 72 and my wife is 70 years old.
This answer has been provided by reverse mortgage industry expert Michael Branson.
A. There is no difference in the amount of the loan for which you and your wife would be eligible for either the purchase or the refinance, the Principal Limit (or the loan amount benefit to you) would be the same either way. However, there are positives and negatives to each approach and it really depends on your goals as to which outweighs the other.
Firstly, HUD has some very specific guidelines on the purchase reverse program. For instance, the seller cannot pay any of the buyer’s costs, there can be no personal property included in the sale, there are certain costs that title and escrow cannot charge, and all parties have to be aware of these limitations from the start.
The seller and the buyer agree on which parties will handle the title and settlement services (usually the seller with the strong influence of the seller’s agent) and if that entity and their employees have never closed a reverse mortgage purchase and do not follow the instructions given to them on the very first day of the transaction, it can cause delays and had feelings at the time of closing when they suddenly realize they have to do things differently than they do on traditional or forward mortgages and they do not have the experience and never stopped to read the initial instructions.
If you close the purchase with no loan, the time required to do so is typically much quicker – but then you also may not have all the lender required protections such as the appraisal, the title inspection/insurance, etc.
Both HUD and we have published purchase guidelines and frequently asked questions that if you become familiar with from the start and if they do not negative impact the manner in which you want to structure your purchase (you’re not looking for a big seller credit; it’s not a brand new home that you are looking to close on the day after the certificate of occupancy is issued; you’re not asking for a country club membership or a tractor to be included in your sale or some of the other issues covered in our information), then the purchase reverse mortgage may save you money, time and ensure the reverse mortgage if you are depending on it.
Let me explain further.
There are costs associated with every transaction, sale or refinance. In some states, those costs are higher than others. If you can close the property with the reverse mortgage rather than doing the loan later, you can eliminate the need for the second transaction and therefore the additional time and expense. Also, not all properties meet the HUD criteria.
If you find a home that you intend to buy whether you can ever get a reverse mortgage or not, then this may not be important to you. If your financial plans rely on you being able to get that reverse mortgage later, then the only way to ensure that you can get the loan on that particular home is to get the loan at the time you purchase and have your contract drawn contingent on receipt of the financing.
This way, if for any reason the home is not eligible under the HUD requirements, you would have the opportunity to cancel the purchase if you wished or you could close the loan all cash knowing you would not be able to get a reverse mortgage later, but either way, it would be your call.
The other consideration is the manner in which you want to receive your reverse mortgage funds and the amount for which you qualify. With reverse mortgages, you don’t apply for a loan amount as you would with a forward or traditional mortgage.
Your ages, the property value (or the HUD lending limit, whichever is lower) and the interest rates combine to determine your Principal Limit which is the maximum amount you can receive under the program. From that Principal Limit, any costs to obtain the loan are subtracted. In the case of a refinance, any current loans on the property must be paid in full and in the case of a purchase, the remainder of the funds are used to purchase the home. But HUD has another twist.
If you do not need all the funds to pay off what they term “Mandatory Obligations” (loans or liens against the home), they limit the amount you can receive in the first 12 months on a refinance transaction. 100% of the funds are available immediately for a purchase.
On an adjustable rate line of credit, you can take any amount up to the full amount available to you on the program any time during the first 12 months and then any funds you do not receive in the first payout, you can elect to receive any time after 12 months. On the fixed rate loan, you must take a full draw of all funds available at the loan closing and then you forfeit any funds not available to you at that time under the HUD rules.
This means that you may have to also consider the payout options on a refinance transaction to make certain that the amount available to you in the first 12 months is adequate and it might limit your options on the fixed versus the adjustable line of credit options (if that is even a consideration of yours since the fixed rate requires a full draw at closing).
Have a look into the reverse purchase calculators available online that allows you to see what benefits you would receive as well as links to the frequently asked questions. The best thing to do is to play with the numbers a bit and see which way works best for you and your circumstances and then to plan accordingly. If you have any questions about the program and how it works.