By Lew Sichelman
WASHINGTON (MarketWatch) --
Question: I have many questions regarding the Home Equity Conversion Mortgage. How much down payment is required? Is there really no verification of income or assets? Do we have to sell our current house first (it is currently listed for sale)? Would it be possible to find a condo in a retirement development in Southern California that would be approved under this program?
Answer: You are referring to the new Home equity Conversion Mortgage for Purchase program, which was authorized by Congress in the Housing and Economic Recovery Act of 2008 that took effect Jan. 1.
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The program, which is aimed largely at persons 62 years or older who want to move down the housing ladder, allows seniors to sell their current residence and use a reverse mortgage to buy a new one, all in a single transaction that eliminates the need for a second set of expensive closing costs. HECM's are insured by the Federal Housing Administration.
According to
Monte Howard, affinity marketing director at Atlanta-based Generation Mortgage, the down payment on the new residence is based on three factors:
The youngest purchaser's age. The older the buyer, says
Howard, the smaller the down payment.
Prevailing interest rates. The lower the rate, the smaller the down payment on a reverse mortgage that comes with a fixed rate that never changes over the life of the loan. But adjustable-rate reverse loans "have a special rate factor" called "the expected rate" that is used in the down payment calculation,
Howard reports.
Value. Lenders use either the property's sale price or appraised value, whichever is less, to determine the loan amount, which is then used to determine the down payment. But for properties valued above the current FHA HECM lending limit of $625,000, you'll have to come up with more cash, for every dollar in value above the limit will add a dollar to the down payment.
According to
Howard, neither a purchaser's income nor credit score are factors in qualifying for a HECM. "A prior bankruptcy, for example, would not affect a prospective purchaser's ability to qualify as long as it is not a current, unresolved proceeding," he says.
But there is limited asset verification. Purchasers must demonstrate that they have the required down payment and that the money has not been borrowed. Financial gifts appear to be acceptable under certain guidelines intended to confirm that the funds are truly a gift, not an undocumented loan.
Howard also says that purchasers are not required to sell their current home prior to the closing of their reverse mortgage purchase. But they must occupy their new home within 60 days of closing. Purchasers can retain their current home as a rental property as long as they are capable of meeting the financial obligations of maintaining both homes.
And as for your final question, any condo that meets FHA requirements can be purchased through the HECM reverse mortgage program.
Q: I am 68 years old and have owned my home for 28 years. I am now in the process of refinancing to take advantage of a lower interest rate. Does the HECM include the refinancing of existing mortgages or is it for new purchases only?
A: Eric Bachman, chief executive officer at Oakland, Calif.-based Golden Gateway Financial, says most HECMs are used by seniors who want to remain in their homes. They work best when you own your home sans mortgage, or at least almost free and clear.
But you can use them to replace your current financing. And depending on your age, the property's value and what you still owe, a reverse mortgage could be a good way to generate additional income.
"If you still hold a forward mortgage on your property, a reverse mortgage can help eliminate your remaining debt while potentially creating additional funds that can be drawn as a lump sum or a monthly payment over time," Bachman says.
Based on the little bit of information you provided in your question, the reverse mortgage expert thinks that because of your relatively young age, a tenure payment "might be the best option."
A tenure payment is a monthly payment to you from the lender -- hence the name "reverse" mortgage -- for as long as you own your home. Better yet, because a HECM is a no-recourse loan, once it comes due you are protected from ever owing more than the fair market value of the home at the time of its sale.
