by Mark Schumacher, Home Equity Retirement Specialist, Retirement Funding Solutions
Awareness of the FHA reverse mortgage program has grown significantly in recent years, largely due to TV ads promoting the program. Given that it’s been available for over a quarter century, it’s about time! The same cannot be said about HECM For Purchase, the little-known program FHA created in 2009 for baby boomers and empty nesters wanting to purchase their next primary residence.
HECM For Purchase, H4P for short, allows homebuyers age 62+ to purchase their next home with a one-time down-payment of roughly half the purchase price and never have a monthly mortgage payment.
In 2008, I talked with a retired homebuyer regarding her options for purchasing her home. She knew she didn’t want a mortgage payment but she either didn’t have all the cash to buy it outright or she wanted to keep some of the cash liquid to use in retirement. Since H4P didn’t exist yet she did the next best thing. She purchased the home with conventional financing which reduced the cash she needed to bring to close. Once that closed she did a reverse mortgage to pay-off the mortgage and she had no mortgage payment and liquid cash to use in retirement. Perfect solution, right?
Wrong, it wasn’t the perfect solution. To achieve the end goal that she wanted (no mortgage payment and liquidity for retirement) she had to go through 2 closings – 1 to buy the home and 1 to refinance and eliminate the mortgage payment. That meant added cost and added time – inefficient.
That’s why FHA created H4P in 2009. H4P allows homebuyers age 62+ to purchase their next primary residence with about a 50% down-payment and have no monthly mortgage payment. That means more cash reserves for retirement and cash flow unhindered by any mortgage payment.
Here’s an example. Bill & Betty Boomer have paid their last college tuition bill and the kids are officially on their own and supporting themselves. As much as the Boomers have enjoyed their home and raising the kids there, it’s not such a good fit for them anymore. They’ve had their eyes on another community and decide this is the time to make the move – it’s not going to get any easier after all. In weighing their decision on how to pay for the home they consider paying cash, which they could do from the sale of their existing home, but aren’t crazy about losing control of that much retirement reserves. They could use conventional financing (their credit is sterling), but of course a mortgage payment in the retirement years is not appealing either. They learn about H4P and find it addresses those 2 concerns better than anything else. They are both age 68 so to buy a $300,000 home they will bring $142,000 to closing and they add about $158,000 to their retirement reserves, and they have no monthly mortgage payment.(1)
The loan balance and accrued interest come due upon a maturity or default event such as no longer living in the home as the primary residence, failure to pay homeowner’s insurance, property taxes, or association dues (if applicable), or failing to maintain the property. The equity remaining in the home when it’s paid back is the homeowner’s, or their estates. If there is no equity they are protected by the non-recourse provision and have no responsibility for any shortfall and no deficiency judgment may be taken against the borrower or his estate.
Reverse Mortgage is for homeowners that want to remain in the home they are in. H4P is for those wanting to buy their next primary residence. H4P is about protecting and preserving retirement income and helping people buy their dream home. It’s appealing to homebuyers because of the purchasing power it gives them, the security of remaining in their home as long as they desire, and the strength it adds to their retirement income plan. Find out how much your housing wealth can help you in retirement, sooner rather than later.
(1) Home Equity Conversion Mortgage using a Fixed Rate product of 5.06% as of 8/6/15, APR 7.175%