How to Use a Reverse Mortgage to Downsize a Home

Many older homeowners reach a point where their current home no longer fits their lifestyle, either it’s too large, requires too much maintenance, or is located far away from family. At the same time, few seniors want to take on a new monthly mortgage payment in retirement.

A Home Equity Conversion Mortgage (HECM) for Purchase, often called a reverse mortgage purchase, gives seniors a way to buy a new home while eliminating their required monthly mortgage payments. This program allows seniors to move to a more comfortable home while preserving their monthly cash flow.

What is the HECM for Purchase program?

An HECM for Purchase is a reverse mortgage specifically designed for buying a new home. Instead of taking out a reverse mortgage on the home you already own, the loan is attached to the property you’re buying.

The program is backed by the Federal Housing Administration (FHA) and follows the same rules as a traditional HECM, including age, occupancy, and financial assessments. The key difference is that the loan is used directly as part of the home purchase.

How buying a home with a reverse mortgage works

A reverse mortgage purchase still requires the borrower to bring a down payment to closing. This typically ranges between 45% and 70% of the home’s price, depending on the age, interest rates, and closing costs. The reverse mortgage finances the remaining portion of the purchase.

Once the loan is in place, the borrower doesn’t make any monthly mortgage payments, and the loan balance continues to grow over time. The borrower is responsible for paying property taxes, homeowners insurance, HOA dues, and basic maintenance. After closing, the borrower moves into the new home as their primary residence.

Benefits of using a reverse mortgage for downsizing

• Eliminate your mortgage payment: A reverse mortgage eliminates traditional mortgage payments, which can help lower your budget during retirement.
• Buy a home that better suits your needs: You can choose a single-story home, a low-maintenance community, or property closer to your children and grandchildren.
• Increase your purchasing power: Combining the sale proceeds with a reverse mortgage may allow you to buy a better home than you could have with cash alone.
• Preserve liquid savings: You don’t have to drain your retirement accounts or investments to fund the home purchase.

Downsides of using a reverse mortgage for downsizing

• Less remaining equity: Because interest and fees accrue over time, you’ll have less equity available for future needs.
• Upfront costs are higher: FHA insurance premiums and closing costs can make the transaction more expensive at the start.
• Not ideal for short-term ownership: If you expect to move again in a few years, you may not stay long enough to benefit from the program.

Eligibility and property requirements

To qualify for an HECM for Purchase, at least one borrower must be 62 or older, and the property must be used as a primary residence. Borrowers must also pass the FHA’s financial assessment, which reviews income, credit history, and the ability to maintain taxes, insurance, and home upkeep.

Properties must also meet the FHA’s minimum property standards and be approved for reverse mortgage financing. Single-family homes, townhomes, some condos, and certain manufactured homes can qualify. Condo and manufactured home buyers should be aware that additional HUD rules may apply.

Down payment and closing costs: What to expect

The required down payment is based on your age, interest rate assumptions, and the home’s price. Older borrowers typically qualify for a lower required investment. And the down payment must come from your own funds or proceeds from the sale of your prior home. Reverse mortgage proceeds cannot be used for the down payment.

Closing costs for HECM for Purchase loans may also differ from traditional mortgages. FHA insurance premiums, lender fees, and other charges can impact the total upfront costs, so borrowers should review loan estimates carefully.

The bottom line on using a reverse mortgage to downsize

A reverse mortgage purchase allows older homeowners to downsize while eliminating their monthly mortgage payments. If you’re considering buying a new home with a reverse mortgage, exploring quotes and speaking with a HUD-approved counselor can help you understand the different options available.