Any advisor worth his or her proverbial salt is familiar with reverse mortgages, and how the unique arrangements can allow house-rich but cash-poor seniors to afford to remain in their primary residences.

But there is a lesser-known yet more-intriguing use of the financial tool: letting qualifying buyers purchase a home with a decent down payment, but no mortgage to pay off, and with no in-depth consideration of their income, assets, or credit situation.

Reverse Mortgage Refresher

The traditional use of a reverse mortgage (also known as a “Home Equity Conversion Mortgage,” or “HECM”) by Americans over the age of 62 is to tap equity they have accumulated in their primary residence.

The amount available depends on the homeowners’ ages, the value of their home and home equity, where they live, and the prevailing interest rates.

Homeowners in their 60s can get as much as two-thirds of the home’s equity back in the form of cash, a monthly check, or a line of credit. You can run some scenarios with the calculator available at tinyurl.com/revmort.

There is no mortgage application, but there could be a significant amount of fees charged to the borrower (or tacked on to the borrowed amount) once the reverse mortgage is approved.

Once the transaction is completed, the only meaningful future financial responsibility of the owner will be to pay for maintenance, upkeep, insurance, and property taxes.

There is no requirement that the reverse mortgage ever be paid off by the borrower. Instead, once the homeowner either dies or vacates the residence for twelve months, the lender sells the property in the open market.

The lender uses the sales proceeds to first pay off the borrowed amount (plus fees and accrued interest). Any remaining funds go to the homeowner or her estate.

If the lender eventually sells the home for less than the borrowed amount, the homeowner (or her estate) still owes nothing. The lender’s potential loss is usually covered by a government-sponsored insurance program.

A Relatively New Reverse Mortgage

In 2009 the Department of Housing and Urban Development announced the “HECM for Purchase” program, designed to give seniors a chance to buy homes using reverse mortgages.
There are many reasons a recent retiree would want a new home, including the desire to move to a warmer climate, or closer to far-flung family members, or “right-sizing” to a home more appropriate for an owner of a certain age.

But the main attraction of using a reverse mortgage to purchase the place will often be financial.

First, it could be retirees without enough predictable income from Social Security or a pension to qualify for the more-stringent standards established by lenders today. Or those who are recently divorced or widowed, and don’t have quite the income or liquid assets they did when they were in a couple.

Another group of prospective users might be clients who have the lion’s share of their assets in tax-sheltered IRAs, and don’t wish to incur the income-tax hit associated with withdrawing funds to make a cash purchase, or monthly mortgage payment.

An even more common occurrence these days is a homeowner who hasn’t been able to sell their current primary residence, but is eager to purchase a new retirement home at today’s depressed prices.

Even would-be renters might prefer the certainty of using a reverse mortgage to purchase a permanent home, rather than signing up for a lifetime of monthly rent payments.

Finally, it might be a client wise enough to realize that using the reverse mortgage to purchase a home reduces the liquidity risk and exposure to the housing market that accompanies more traditional methods of home buying and financing.