Reverse Purchase – How does it work?
By Tyler Plack
Tyler Plack is the President of South River Mortgage. Tyler holds an active FHA Direct Endorsement (DE) underwriting certification and is the author of The Retirement Solution: Maximizing Your BenefitTyler is a seasoned entrepreneur and real estate investor renowned for his expertise in reverse mortgages and his commitment to addressing seniors' equity challenges. Tyler brings a unique perspective to his ventures, having built several successful companies throughout his career. His insights are frequently sought by industry publications, where he is recognized for his vast knowledge in the realm of reverse mortgages.
An avid investor in income-producing properties, Tyler is dedicated to helping seniors navigate their financial needs with compassion and expertise. When Tyler is not helping solve America's retirement crisis, he is a skilled pilot flying airplanes for fun.
While many people may be familiar with the reverse mortgage program, its less-popular cousin is the reverse for purchase (also known as HECM for purchase). The reverse for purchase is part of the same overall program as the HECM program, but it comes with a few distinct benefits.
In this article, you will learn:
- What is a reverse purchase and how it works
- How to qualify for a reverse for purchase
- Why a reverse for purchase might make sense
- Go through an example reverse for purchase scenario
What is a reverse for purchase?
A reverse mortgage for purchase entails exactly what the name says. It is when you are using a reverse mortgage to purchase a new home.
That may sound confusing – how could you use a reverse mortgage to purchase a home? After all, reverse mortgages are for people who have substantial equity in their homes, and when you purchase a home, you generally have very little equity in the home.
This part is where the reverse mortgage for purchase flips things on its head. In a normal purchase, you would make down payment and then make monthly payments.
Instead of making a down payment and monthly payments, in the reverse for purchase, you would make a larger one-time down payment, and there would be no principal and interest payments after that.
In the table below we have a comparison between the conventional loan and a reverse mortgage for purchase.
| Conventional Mortgage | Reverse for Purchase | |
| Down Payment | 3% to 20% (generally) | 25% to 50% generally (depending on age and interest rates) |
| Monthly Principal & Interest Payments | Required | Not required |
| Mortgage Insurance | Required if putting less than 20% down | Required throughout loan (0.5% of balance) |
| Seller concessions | 3% to 6% | 6% |
See what your down payment would be »
Down Payment
Conventional loans: The down payment requirement for a conventional loan is generally anywhere between 3% to 20%, depending on your eligibility as a first-time homebuyer as well as credit history.
HECM for Purchase: The down payment requirement for a HECM for Purchase is generally anywhere between 25% to 50%. These numbers will fluctuate based on age and reverse mortgage interest rates, so it is important to check your numbers. Two different people buying the same property may have different down payment requirements, simply due to differences in age. Click to calculate your down payment requirement
Principal & Interest Payments
Conventional loans: Conventional loans require monthly principal and interest payments. Depending on the loan, they may also require an impound (escrow) account.
HECM for Purchase: The HECM for purchase does not require monthly principal or interest payments. During the loan, you are responsible for the property taxes and homeowner’s insurance.
Mortgage Insurance
Conventional loans: Conventional loans generally require mortgage insurance if the down payment is less than 20%.
HECM for Purchase: The HECM for purchase requires mortgage insurance throughout the loan. Note that the mortgage insurance does not need to be paid as a monthly payment; it is simply financed into the loan balance.
When might a reverse mortgage for purchase make sense?
A reverse purchase usually makes the most sense for homeowners who are selling one home and moving into another. This program might make sense for you if you plan to age in place in your new home and if you plan to stay there.
Many retirees struggle to qualify for a mortgage loan after retiring. This is because the decrease in income that many experience when retired. Fortunately, the reverse mortgage for purchase has more flexible eligibility requirements than conventional mortgage loans, which rely heavily on credit score and debt-to-income ratios.
When might a reverse mortgage for purchase not be right for me?
Due to the large down payment (25% to 50%, depending on age and interest rates), the reverse mortgage for purchase does not often make sense for first time homebuyers, who may have a hard time coming up with the required down payment.
A reverse mortgage for purchase may also not make sense if you are not planning to stay in the home for long. The reverse mortgage for purchase is not bridge financing; it is designed as a long-term loan, and other financing options might make more sense if you do not plan to live in the home for very long.
What are the pros and cons of a reverse mortgage for purchase?
| Pros | Cons |
| No monthly principal and insurance mortgage payments | A larger down payment is required to qualify |
| Flexible qualifications | |
| Seller concessions up to 6% | |
How to know if you are eligible?
The first step is always to check a reverse mortgage for purchase calculator. Using a quick calculator will tell you:
- Interest rates
- Required down payment
After you have checked a reverse for purchase calculator, you can read about reverse mortgage eligibility to make sure you meet the basic requirements.
Of course, you are always welcome to get a quote, and our team members will do the heavy lifting for you.
How do I get pre-approved for a reverse mortgage for purchase?
When you get your quote for your reverse mortgage for purchase, we will provide you with a pre-approval letter. Get your pre-approval letter →
Where can my down payment funds come from?
According to HUD Single Family Housing Policy Handbook (4000.1), all the following are acceptable sources of down payment:
- Checking and savings account
- Cash on hand
- Money from sale of a home
- Money from sale of personal property
- Retirement accounts
- Stocks and bonds
- Private savings clubs
- Gifts
- Contributions from interested parties
- Disaster relief grants
- Employer assistance
As you can see, there are many allowable sources for the down payment funds for a HECM for purchase. The following are unacceptable down payment sources according to the Federal Housing Administration:
- Sweat Equity
- Trade Equity
- Rent credit
- Premium Pricing
Are seller concessions allowed on a HECM for purchase?
Yes, seller concessions are allowed on HECM for purchase loans. The Federal Housing Administration limits seller concessions to 6%.
What should I look for in a HECM for purchase lender?
When evaluating the different options available to you, you should look for a lender that is experienced and trustworthy. You would not want to work with a fly-by-night company. It is important to find a reverse mortgage lender that has a proven track record of helping older Americans – especially with HECM for purchase loans.
