HECM for Purchase

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DC3509
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HECM for Purchase

Post by DC3509 »

Does anyone here have any experience with a HECM for purchase?

The long story short is -- my parents have a paid-off house in an extremely low cost of living area. The house isn't worth that much -- think high five's or low six's. We have sentimental attachment to it, but the bottom line is that it is about the opposite of what they need at this stage in their lives -- the house is very big, very old, lots of steep stairs, and things are constantly breaking, etc., which continues to force my parents to dip into a relatively small nest eggs. They want to be closer to my sister who lives in a relatively LCOL area, but higher than where my parents live now.

I was reading a lot about the HECM for purchase program and this seems like a very creative work-around getting a mortgage and having monthly payments, which would definitely put a crimp into their small budget. They could likely afford the very large down-payment required by HECM through the sale of the current house. I understand that there is a good chance that they can end up upside down on the HECM in the long-run, but my understanding is that this is FHA non-recourse loan -- so if there is a profit, you get the money, and if it is underwater, the government eats it (I know that sort of program likely gives many heartburn here, yours included, but that's what the program seems to be, for better or worse). Neither my sister nor I care at all about inheritances or the house where they currently live -- if you could parlay that into a better house while they are still in good health, that seems like a decent solution to me, especially when the current house is a potential injury trap and continues to bleed money.

But I know there are some things I may not be thinking of, so wanted your perspectives. Thanks in advance.
Spirit Rider
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Re: HECM for Purchase

Post by Spirit Rider »

It is usually not a good idea to use an acronym without defining it, if the vast majority of forum members will have no idea what it is.
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DC3509
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Re: HECM for Purchase

Post by DC3509 »

Home Equity Conversion Mortgage for Purchase
vested1
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Re: HECM for Purchase

Post by vested1 »

A lot depends on their ages, or more accurately, the youngest spouse's age. From my understanding the age of the youngest spouse (co-owner) determines the available loan amount based on percentage of appraised equity, which is never more than a bit over 60% of equity for someone in their 90's, and around 51% for someone in their early 60's. It would seem to me that if they want to buy a home in a higher cost of living area that using a HECM would probably result in a burdensome mortgage, causing them to dip into limited resources even further.

Without knowing the particulars it would seem a better plan to go ahead and sell the old home, which would provide 100% of the equity minus commission for the new purchase. I believe that using a HECM for purchase works out better when downsizing and being able to purchase the new home outright with the proceeds. Living in a non-recourse State does add the ability to walk away, but keep in mind that if they do so you are also walking away from the equity minus the loan. The fees are also relatively high for this product from what I've seen.

If they do sell the old home make sure they can deduct improvements and commissions to avoid going over the 500k/couple max. I would input "HECM" or "reverse mortgage for purchase" in the search box to find earlier threads on this subject. Hopefully someone with greater knowledge of this process will chime in.
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Pajamas
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Re: HECM for Purchase

Post by Pajamas »

What would the ideal house for them cost vs. the value of the current house?

Here is basic information:

https://www.hud.gov/program_offices/hou ... m/hecmabou

I would contact an approved lender for a counseling session to discuss it if it seems like a good idea based on the information on that page. From what you have said, it seems to be appropriate but there may not be much advantage to doing that instead of selling their current home and buying another one with the proceeds if that is possible, depending on the relative value of the houses.
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DC3509
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Re: HECM for Purchase

Post by DC3509 »

vested1 wrote: Wed Jun 27, 2018 10:14 am A lot depends on their ages, or more accurately, the youngest spouse's age. From my understanding the age of the youngest spouse (co-owner) determines the available loan amount based on percentage of appraised equity, which is never more than a bit over 60% of equity for someone in their 90's, and around 51% for someone in their early 60's. It would seem to me that if they want to buy a home in a higher cost of living area that using a HECM would probably result in a burdensome mortgage, causing them to dip into limited resources even further.

Without knowing the particulars it would seem a better plan to go ahead and sell the old home, which would provide 100% of the equity minus commission for the new purchase. I believe that using a HECM for purchase works out better when downsizing and being able to purchase the new home outright with the proceeds. Living in a non-recourse State does add the ability to walk away, but keep in mind that if they do so you are also walking away from the equity minus the loan. The fees are also relatively high for this product from what I've seen.

If they do sell the old home make sure they can deduct improvements and commissions to avoid going over the 500k/couple max. I would input "HECM" or "reverse mortgage for purchase" in the search box to find earlier threads on this subject. Hopefully someone with greater knowledge of this process will chime in.
It is my understanding that when you do a HECM for purchase, you are not required to make any mortgage payments. The mortgage payments are added to the balance of the HECM side of the loan. When you sell or die, the HECM gets paid off first; so if you make no payments on the HECM, the equity from the prior home essentially covers those payments. If the HECM exceeds the value of the equity, the FHA takes the hit - not you or your heirs. Yes, you lose the equity value in the house -- that's the downside risk.

I have a hard time understanding how the conventional sell the old home and just obtaining a regular mortgage is a better option. If you do that, a big chunk of your monthly cash flow is going to be eaten up by the mortgage. With this product, a chunk of your home equity will be eaten up by the mortgage but it doesn't impact your cash flow -- it just draws down on your prior home equity. Cash flow is far more important now.

I should add two more data points -- the home equity is not going to make a huge difference in their retirement, either way -- this is not a million dollar house that will help fund a nice nursing home, should we ever need it. I am already resigned to the fact that nursing home care will either be through Medicaid or come out of my pocket. Also -- housing values in the area where they live are and have been on the decline. Bad mixture of no jobs in the geographic area, elderly population, opioid overdoses, etc. The house is losing value, if anything.
skepticalobserver
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Re: HECM for Purchase

Post by skepticalobserver »

Origination fees on regular and "reverse to purchase" HECMs are a killer. Unlike a conventional loan where the fee is based on the loan amount only, HUD permits an origination fee on a HECM up to 4% of the FMV of the real estate.

It pays to shop HECMs for the fees.
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Pajamas
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Re: HECM for Purchase

Post by Pajamas »

DC3509 wrote: Wed Jun 27, 2018 10:46 amthe home equity is not going to make a huge difference in their retirement, either way -- this is not a million dollar house that will help fund a nice nursing home, should we ever need it. I am already resigned to the fact that nursing home care will either be through Medicaid or come out of my pocket.
I think the HECM purchase is a bit of a red herring in trying to figure out the best solution for them. The advantage is in reducing financing costs by combining transactions.

It might help to separate the various decisions and issues and think about them separately and then look at the best way to accomplish everything.

For instance:

1. Should they sell their house? (Yes, it is not suitable for them, requires a lot of upkeep, and is decreasing in value.)
2. Should they move to a different area? (Yes, it is important to be near their daughter even though housing costs are higher there.)
3. Should they buy a new house or a condo or rent an apartment?
4. If they should buy, can they afford something suitable?
5. If not, is a reverse mortgage a viable solution? Are there other solutions available?
6. How will their future health care costs be covered? What is the best way to provide for those costs given their financial situation?
7. Will housing decisions made now affect qualifying for Medicaid if it is needed?
Topic Author
DC3509
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Re: HECM for Purchase

Post by DC3509 »

Pajamas wrote: Wed Jun 27, 2018 1:20 pm
DC3509 wrote: Wed Jun 27, 2018 10:46 amthe home equity is not going to make a huge difference in their retirement, either way -- this is not a million dollar house that will help fund a nice nursing home, should we ever need it. I am already resigned to the fact that nursing home care will either be through Medicaid or come out of my pocket.
I think the HECM purchase is a bit of a red herring in trying to figure out the best solution for them. The advantage is in reducing financing costs by combining transactions.

It might help to separate the various decisions and issues and think about them separately and then look at the best way to accomplish everything.

For instance:

1. Should they sell their house? (Yes, it is not suitable for them, requires a lot of upkeep, and is decreasing in value.)
2. Should they move to a different area? (Yes, it is important to be near their daughter even though housing costs are higher there.)
3. Should they buy a new house or a condo or rent an apartment?
4. If they should buy, can they afford something suitable?
5. If not, is a reverse mortgage a viable solution? Are there other solutions available?
6. How will their future health care costs be covered? What is the best way to provide for those costs given their financial situation?
7. Will housing decisions made now affect qualifying for Medicaid if it is needed?
I feel like the advantage is in improving cash flow and not outliving your home equity. If you do a conventional reverse mortgage and pay forward the mortgage, once the money is gone -- that's it. In a HECM for purchase, even if you eat up all of your home equity, the FHA backstops the loan and they will not go after anyone else. That seems to be a major advantage for a HECM over a conventional reverse mortgage.

I agree that these are all questions, which I have considered and are still considering. The bottom line is though -- if you want to move from a lower cost of living area to a higher one -- even a modestly higher one -- there are only so many things you can do to come up with the money if the sell of your old home will not cover it (which it won't). The issue becomes even more complicated when you have limited cash flow and do not want a big (or any for that matter) monthly mortgage or rent payment. I am open to other suggestions.
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Pajamas
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Re: HECM for Purchase

Post by Pajamas »

Then talk to someone at an institution that finances HECM purchases and crunch some real numbers based on your parents' situation. It's hard to know if it would be beneficial without having more numbers.
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