HECM for Purchase: Using a Reverse Mortgage to Buy a Home

The Home Equity Conversion Mortgage for Purchase (H4P) allows borrowers aged 62 or older to purchase a new primary residence using a reverse mortgage to finance a portion of the purchase price. It is one of the least-understood products in the mortgage market and an underutilized retirement planning tool.

How HECM for Purchase Works

In a standard home purchase, the buyer brings a down payment and finances the remainder. In an H4P transaction, the process is reversed: the borrower makes a larger lump sum payment and the HECM finances the remaining portion. No monthly principal or interest payments are required on the financed portion as long as the borrower occupies the home as their primary residence and meets loan obligations (taxes, insurance, and maintenance).

The loan balance grows over time as interest accrues. When the borrower moves, sells, or passes away, the home is sold (or the heirs refinance) and the lender is repaid from the proceeds. FHA mortgage insurance guarantees the borrower will never owe more than the home is worth. The HECM is a non-recourse loan.

Borrower Eligibility Requirements

• ✦All borrowers on title must be 62 years of age or older
• ✦The purchased home must be the borrower's primary residence
• ✦Eligible property types include single-family homes, FHA-approved condominiums, and 2-4 unit properties where the borrower occupies one unit
• ✦Manufactured homes may be eligible if they meet FHA requirements
• ✦The borrower must complete HUD-required counseling before the loan can be originated
• ✦The borrower must demonstrate the financial ability to maintain the home including taxes, insurance, and maintenance (residual income and credit history are evaluated)

How the Down Payment Is Calculated

The required down payment for an H4P transaction depends on the borrower's age, the expected interest rate, and the lesser of the purchase price or the appraised value. Older borrowers and lower interest rates typically result in a lower required down payment because the loan proceeds available are higher.

As a general illustration, a 75-year-old purchasing a $500,000 home might be required to bring approximately $200,000 to $225,000 as a down payment, with the HECM financing the balance. A 62-year-old in the same scenario would typically need a higher down payment because their life expectancy is longer. Actual amounts must be calculated using the current expected rate and FHA's principal limit factor tables.

Eligible Sources for the Down Payment

• ✦Proceeds from the sale of the borrower's prior home
• ✦Retirement account distributions (401k, IRA)
• ✦Gift funds from family members are permitted but must be documented
• ✦Bridge loans are not permitted as a source of down payment funds
• ✦Seller concessions are not permitted on H4P transactions

How to Position HECM for Purchase

H4P is most compelling for borrowers who want to right-size their housing without depleting liquid savings. A retiree who sells a large family home and downsizes to a smaller property can use a portion of the sale proceeds as the H4P down payment and preserve the remainder for living expenses and healthcare costs, all while eliminating a monthly mortgage payment.

Referral partners who work with older adults, including financial advisors, elder law attorneys, and real estate agents specializing in senior relocations, are excellent sources for H4P leads.

Common Misconceptions

• ✦The lender does not own the home; the borrower retains title throughout
• ✦Heirs are not personally liable for the loan balance beyond the home's value
• ✦The borrower is not prohibited from leaving the home for medical care; the trigger is a consecutive 12-month absence
• ✦The HECM does not become due simply because the borrower turns a certain age
• ✦FHA counseling is required even if the borrower has completed counseling for a prior reverse mortgage