Buying With a Reverse Mortgage
Buying a Home With a Reverse Mortgage
It might seem a bit counterintuitive when you consider that the entertainer Cher is 70 years old. She’s currently finishing out a show in Las Vegas called “Living Proof: Farewell Tour.” Counterintuitive because she’s been performing this very same show for more than 10 years now. She started her Farewell Tour when she was 60.
What’s also counterintuitive is a Reverse Mortgage. A standard mortgage is a loan where the homeowners pay back the mortgage monthly until it’s retired.
A reverse mortgage is a way to convert homeowner equity into cash and the buyers don’t have to pay it back. At least as long as they’re living in the property. But many don’t know this special program also offers a way to buy a home with a reverse mortgage. How can that happen?
A standard reverse mortgage is for homeowners 62 and older to convert a portion of the equity in their primary residence into cash. The reverse lender will provide a lump sum, a line of credit or a combination of both.
The funds are distributed tax free and there are no monthly payments. Interest accrues on the funds distributed and the loan is due and payable when all reverse borrowers leave the property. Homeowners can then use the distributed funds to buy another primary residence.
The funds from the initial reverse mortgage will typically cover around 50% of the purchase price of the new property with the remaining funds coming from the buyer’s retirement or savings account. The maximum loan-to-value for a reverse mortgage depends upon the age of the youngest borrower.
The older the age, the more that can be accessed. And because a reverse mortgage must be a standalone and not combined with another first lien, the property being purchased, on average will need another 40-50% of cash from the buyers.
With a reverse to buy a home, there is no traditional mortgage qualifying. There are no debt ratios to consider and employment verification, only that the buyers can demonstrate the ability to pay property taxes, insurance and maintenance. Buying a new home with no monthly payments? It’s a reverse mortgage in play.