Why Would Seniors Want to Use the Reverse For Purchase?

It's rather ironic that seniors control 77% of ALL financial assets in the U.S., they own 70% of all money markets and CDs in the country, and 67% of seniors own their houses free and clear, according to Senior Facts and Figures; and yet, they go to their local banks and are turned down for a loan to purchase a home because they are short a few hundred dollars a month for qualifying for a mortgage.

This to me is outrageous and I guess Congress must have thought it was important to create a purchase loan for seniors because last year they drafted and signed a new loan for seniors as part of the stimulus package called, The Home Equity Conversion Mortgage Reverse for Purchase. FHA insures this loan and established FHA guidelines to protect seniors. With this loan, income and credit is not important. The criteria are that the youngest borrower must be 62 years old and have a certain amount of down payment (typically 45% to 55%). This down payment can come from: the sale of their home, savings, their financial portfolio, and even a gift. The lender backed by FHA in essence, matches their down payment with a loan contribution based on the age of the youngest borrower, their down payment, expected rate and price of the home they are purchasing.

As an example, if a 68 year old senior wants to purchase a home for $365,000 and is able to put $166,000 down, he could receive a lender loan/contribution of approximately $199,000 (at 5.49% expected rate) with no monthly payment - credit and income are not important qualifiers. This means the borrower would qualify for more of a home that he really wants to retire in such as a one level ranch style house, ADA friendly and energy efficient in a neighborhood with amenities he or she desires in a community development with tennis courts, pool, clubhouse, boating dock, golf course, and walking trails.

It makes sense that it was part of the stimulus package because if more seniors were able to obtain a loan that allowed them to move closer to their children, purchase their retirement home with amenities, (and if builders would build more one level homes), the housing industry would expand and more jobs would be created. We all know or have read about the affects of the housing industry on the economy. We only have to walk through a Home Depot, Lowes, or ACE Hardware and see all the products related to home building and the millions of jobs it impacts nationwide.

It is also interesting to note that this loan is attracting senior borrowers from different income levels. There are several elderly people I have talked to recently that don't want a mortgage payment. However, they also don't want to put all their eggs in one basket by paying all cash for their homes. Many want to hold on to their cash and their financial portfolios, especially since the housing industry is uncertain and has not made the gains it once did. If you take the above scenario of purchasing a home for $365,000 and put $166,000 down and acquire a loan/contribution of $199,000 and compare it to a traditional loan with a 5% interest rate for 30 years, your payment (with a traditional mortgage) would be approximately $1,068. per month. Over a ten year period those payments would add up to approximately $128,160. and after 10 years the borrower would have only paid $37,129. towards the principal. Could a borrower find a better use for his money such as; savings for in-home care at a later date, long term care or just a higher yield investment or a savings plan for a rainy day?