The statistical significance of using a HECM for Purchase to buy a new home is almost nil relative to the prominent use of a traditional HECM Reverse for refinancing. There are several reasons the HECM for Purchase is rarely used.
- Heavy down payment at 40-50% of the sales price.
- FHA does not allow any seller contributions as part of the sales contract.
- Sellers are also not allowed to make any repairs or other contributions to the transaction.
- Buyers must complete HUD Counseling
- Costs can be higher at max MIP insurance levels
- The opaque nature of the program often leaves realtors and buyers in a quandary. There is just not enough understanding for people to consider a HECM for Purchase over an all cash offer or conventional financing options in many cases.
These are the primary draw backs that underscore the surprisingly low use of the HECM for Purchase relative to the standard HECM. The most daunting element is not the down payment but the complete lack of familiarity and understanding on the part of the buyers and their fiduciaries. Here are some of the prominent advantages for those that are motivated to investigate a HECM for Purchase further.
- A viable alternative to an all cash purchase that may increase the level of affordability, flexibility, and outright choice when buying a new home.
- No monthly principle and interest payment will ever be due with the HECM for Purchase thereby creating a higher level of affordability and a more secure retirement.
- Diversification. This is an area you would think the financial advisors would adore but few often take notice. If you can still have the home you want with fee simple ownership doesn’t it make sense not to have all of your money tied up in the house? By using a HECM for Purchase, you afford yourself more liquidity and potential growth and income generating investments versus all cash transactions. Diversification against the unknown future is often referred to as your only free ride.
- A higher level of balance with your retirement plan that equates to a more enjoyable and secure retirement with a lessened fear of running out of money and a more comfortable position that you can live freely within your means. Refer to blog The Paradox of Aging-Four Bucket Strategy.
As the general public wakes up to the HECM for Purchase, we may see the use of a Reverse Mortgage for buying a new home increase. The more people consider planning for their retirement and future, the more they may consider investing time to understand the tools like the HECM for Purchase. Taking the binary view that downsizing your home equates to an all cash transaction that may restrict new home choice and affordability is not the whole equation. Prosperity may come to those that agonize over the apple to apple comparison always trying to create a new normal, but it often comes easier to those that choose wisely and innovate. It could be possible that an apple and an orange fit better as part of an overall retirement plan. That choice is for you to make.