Many seniors find it difficult to manage their finances because of the absence of a running income. Buying a home at this stage seems to be extremely unlikely as gathering funds become a challenge. While there are many financing options available, all of them will require you to make regular mortgage payments, which is simply not possible without a constant cash flow coming in. So, what do you do in such a situation? Is there no way you can find a peaceful abode for yourself?
Fortunately, there are home financing options available especially for seniors that make owning a home possible. The Home Equity Conversion Mortgage for Purchase (H4P) is an example of a reverse mortgage that is deemed to be an ideal solution for seniors looking to own a house. In this article, we will discuss why the HECM for Purchase is considered to be the most effective solution for seniors and what are the different alternatives available.
What is HECM for Purchase (H4P)?
The Program H4P enables home buyers to own a house by making a down payment that is larger than usual. However, under such a financing option, the buyer does not need to make mortgage payments on a regular basis. Through the down payment, the buyer is able to create equity for himself/herself in the home, which is necessary for a reverse mortgage option.
The down payment can, therefore, be seen as going towards the loan proceeds thereby building your equity in the house. However, to be eligible for this loan, you must meet the standards set by the Federal Housing Administration (FHA).
This particular financing option is available for individuals that are 62 years old or more. All of the owners listed on the title of the home need to fall within this age bracket. Other than that, the home that you choose to own through this financing option must be used as the primary residence. There are also different guidelines shared by the FHA and HUD about the property requirements that should be met when choosing the right home.
Moreover, the money that you use to make the down payment for such a reverse mortgage should be held by you for at least 90 days. The source of this money should also be clear and can be obtained from the sale of an asset or from an investment, checking, saving, or retirement account.
How Does it Work?
Reverse mortgages are considered to be extremely flexible and suitable for seniors. With H4P, you do not have to worry about making monthly payments. Instead, accumulation of interest keeps taking place and is only to be paid in case you decide to sell the house. The homeowner’s part of the equity remains the same and its part of the sale goes to the homeowner or their estate.
The down payment requirement in the case of a reverse mortgage is generally up to 55% of the home’s purchase price.Other than that, when you choose such a mortgage option, even though you do not need to make any payments to repay the loan, you must ensure that all the taxes and insurance costs are accounted for. The large amount of down payment is sometimes seen to be costly by some homebuyers but the fact that there are no future monthly costs associated with such a loan provides them comfort.
Refinancing and Cash Out Refinance as Alternatives
Individuals that have existing mortgages also have other options similar to a reverse mortgage. Refinancing an existing mortgage is also possible for homeowners that feel the value of their home has increased overtime. When this happens, the terms of the loan might change as a result of the refinancing and the additional funds will be given out to you, which you can use in whatever way you wish.
In case you want to pay for any repairs or remodeling work need around the house, you can consider a cash-out refinance. With such a financing option you will be able to refinance your existing mortgage in such a way that you opt for a larger amount than the one you applied for in the original loan terms. The difference is paid to the homeowner and the cash can be used for any repairs or remodeling that you wished to make in the house.
However, in both cases, the value of the house must have increased overtime to become eligible for better loan terms.
Why Reverse Mortgage?
A reverse mortgage is thought to be an ideal solution for seniors since it is treated as a separate loan. This means that the seniors can use the payments disbursed through a reverse mortgage to pay off their existing loans. Considering the difficulty that seniors face when trying to manage their finances, a reverse mortgage offers more flexibility and support as compared to refinancing an existing mortgage or a cash-out refinance. Similarly, since the possession of the home isn’t affected as long as you are making insurance and tax payments, seniors perceive this option to be more reliable. With such a mortgage option available, seniors are able to keep their savings untouched and use the cash flow generated through the HECM to take care of the household expenses.
While there are many myths that are continuously associated with reverse mortgages, HECM is a great example of how seniors can increase their cash flow without having to risk losing their homes. The fact that taking such a loan does not take away the ownership and helps retain a particular part of the equity in the house is what attracts many seniors towards this loan. The absence of monthly payments and of strict eligibility requirements makes it possible for many seniors to qualify for the loan. However, the maintenance, tax, and insurance responsibilities still lie with the homeowner and it is strongly advised to adhere to these requirements during the loan term. There are a lot of myths surrounding reverse mortgages, however, you need to be informed on which ones are valid. Here is some information on some of the more popular reverse mortgage myths with explanations.
About the Author
Brian Quigley has been in the Denver mortgage industry since 2003. Customer satisfaction has been his top priority while guiding clients through the home loan qualification process. He is proficient in all types of mortgage financing including FHA/VA, Conventional, USDA, Jumbo, Portfolio, 1031 Exchanges, Reverse Mortgages, Refinancing, Construction loans, and FHA 203K loans.