Is the Retirement Home you want Within Reach?
by Mark Schumacher, NMLS #51975 Home Equity Retirement Originator, Retirement Funding Solutions
HECM For Purchase (H4P) is an FHA loan for homebuyers age 62 or greater. In a nutshell, H4P makes it possible to purchase your next primary residence with a one-time down payment of about half the purchase price without having a mandatory monthly mortgage payment going forward.
Instead of making a monthly mortgage payment these homeowners can choose to allow the interest to be added to the loan balance. Doing so causes the loan balance to grow instead of the gradual decline in loan balance experienced by those making payments with conventional mortgages. Doing so also frees up cash for the homeowner.
H4P can increase the buying power for a homebuyer. Here’s a story to illustrate the point. Tom and Sarah are baby boomers looking for a home more suitable for their empty-nest lifestyle. Being mindful of their retirement goals and having a fixed income they agree they don’t want a mortgage payment. They expect to net $250,000 from the sale of their home so that is the spending limit they set for themselves. That weekend they start looking at new communities and find one that has the amenities, designs, and finishing touches they are looking for. But the plan they like starts at $300,000 and finishes up at $350,000 when they include the upgrades they’ve chosen. For a cash buyer that’s likely the end of the story because they’ve exceeded their spending limit. Not so for an H4P buyer. Using H4P requires a one-time payment of about $175,000 to buy that $350,000 home, and there are no obligatory monthly mortgage payments. Rather than settling for a $250,000 home that really isn’t what they were looking for and using all of their assets from their home sale to do so, H4P allows them to buy their dream retirement home and add $75,000 to their retirement reserves.
The H4P loan comes due once neither homeowner lives in the home as their primary residence. Heirs have the option of selling the home to get the equity out of it or repaying the loan and keeping the home. If there is no equity in the home or it’s upside down they can sign the home over to the lender without being liable for any shortfall. Homeowners are required to stay current on property taxes, insurance and association fees if applicable, and to keep up the home. H4P buyers are underwritten for credit, property charge payment history, and residual income. Those that don’t pass this underwriting could be declined or more likely would have a required escrow. Having an escrow increases the amount required for the one-time payment.
Another perk some homebuyers get from H4P is the ability to purchase their next home, move in, and then sell their departure home. This scenario, as opposed to having simultaneous sell and purchase transactions, might be preferable. First, you’re managing one transaction at a time for a less stressful process. Second, you don’t have to feel rushed into a sell or buy situation in order to time the two transactions together. Third, you don’t have to keep your home “show-ready” while also living in it. And fourth, you avoid a contingency purchase agreement which might reduce your negotiation strength with the seller. Using this strategy requires the one-time payment to come from assets other than home equity since the departure home would not yet be sold as of the date of the H4P purchase. However, bringing the one-time payment is easier to do when you are bringing half the purchase price to closing instead of all the purchase price to closing the way a cash buyer would.
For more information on H4P a 3-minute video introduction is at www.whatish4p.com. A free hour-long on-demand webinar is available at www.h4ppresentation.com. The H4P Buyer’s Guide magazine is available by calling 864.906.2296.
Example given above based on homebuyers age 66, fixed interest rate 5.06% (4/7/17). APR Range 6.649%-6.869%. South Carolina- Board of Financial Institutions Mortgage Lender / Servicer License MLS-1025894; Licensed by the North Carolina Commission of Banks office – North Carolina Mortgage Lender License L-164411. Synergy One Lending, dba Retirement Funding Solutions NMLS # 1025894