Content contributed by Choose Reverse, NRMLA, Statista, Longbridge and FHA:
Baby Boomers are sitting on trillions in home equity, according to the National Reverse Mortgage Lenders Association (NRMLA). These homeowners are seeking different retirement solutions to integrate their home equity into their retirement portfolio and make it more durable over the next 20 to 30 years.
The National Association of Realtors (NAR) estimates that baby boomers made up roughly 39%, or 2.32 million, of the 5.95 million homes bought and sold in the U.S. last year. (Statista report)
Today’s market includes mortgage rates above 6%, low inventory, and elevated home prices, and increasing credit requirements. These factors contribute to often challenging affordability issues. Many of the baby boomers that have a mortgage on their current home likely refinanced during the pandemic to get a very low interest rate.
According to data from the Federal Housing Administration (FHA), there were only 2,063 Home Equity Conversion Mortgage (HECM) for Purchase loans endorsed in 2022 — less than 1/10th of 1% of homes sold last year. Check Your Home’s Value
With the state of the economy, why would baby boomers move into a new home, where their expenses could increase due to higher mortgage rates?
Enter the HECM/Reverse for Purchase financing option.
“Many of these homeowners have a desire to move closer to family or to a more suitable home for their lifestyle in retirement. [They likely] would feel much more confident that they can keep a significant amount of the proceeds from their departure home and not have to make monthly mortgage payments, provided they continue to pay their taxes and insurance and maintain the home,” said Rob Cooper, National Purchase and Builders Sales Leader for Longbridge.
“If the industry were better educated on reverse purchase options, there would be a significant increase in HECM/Reverse Purchase volume. There is an incredible opportunity for growth,” he said.
The Reverse Purchase Market is Underserved
Despite the opportunity, the HECM/Reverse for Purchase market is underserved, Cooper said.
“Most real estate agents, builders and potential customers have no idea that this financing option exists to purchase homes,” he said.
Few loan officers know how to make the reverse purchase product a main part of their business. Additionally, because HECM/Reverse for Purchase did not exist until late 2008, many don’t fully understand the value propositions the product poses.
The HECM for Purchase Product
The product itself is relatively simple. The main difference between HECM/Reverse for Purchase and a traditional mortgage is that the amount of money required for a down payment is currently in the 60-65%* range, based on the age of the youngest borrower and other factors.
The customer would bring roughly 60-65% to the table and the reverse mortgage lender would provide the other 35-40% for the transaction.
“The big difference is that monthly mortgage payments are optional so long as the borrower continues to maintain the home and pay their property taxes and insurance,” Cooper said.
Prieto noted that the product gives borrowers the option to “right-size” their home based on their retirement goals and living situation while creating cash flow.
Opportunities and Benefits
Reverse Mortgages for Purchase represents a big opportunity for customers and the real estate industry in general.
Using a HECM/Reverse for Purchase allows customers to feel more financially secure in making their purchases. It allows buyers to get the home they want, where they want it, while offering more control over their financial situation. They are usually able to keep significantly more of their proceeds from their departure home, with the flexibility to make monthly mortgage payments or not, provided they comply with the loan terms, (maintain their primary residence, property taxes and insurance).
If someone over 55 years old is looking to purchase a home with a traditional mortgage, experts recommend they compare that option with the Reverse for Purchase. Once someone does the comparison, they will see how dynamic the program is and how well it can position someone in their retirement phase of life.
*The down payment range example presented assumes closing costs will be financed into the loan. The information being displayed is for illustrative purposes only. Actual cash required may vary and is based on age of youngest borrower, interest rate, home value, and other factors. Please contact a qualified mortgage specialist for more details.