What Is a Reverse Mortgage?

After diligently paying down your mortgage for years (or decades), much of your net worth could be tied up in your home's value. This can be a tricky financial situation for older adults trying to pay for everyday living expenses, medical bills, home repairs, or anything else. However, homeowners age 62 or older can convert some of that home equity into cash using a reverse mortgage. Instead of making payments to a lender, the lender pays you based on the equity that you've built in your home. Over the life of the loan, your debt increases while your home equity decreases. Eventually—when you sell, move, or die—the home's sale proceeds are used to pay off the loan.

What Is an HECM?

A home equity conversion mortgage (HECM) is a reverse mortgage program insured by the Federal Housing Administration (FHA) and available through FHA-approved lenders. The amount of money that you can borrow through a reverse mortgage depends on:

• The age of the youngest borrower
• Current interest rates
• The lesser of the home's appraised value, the FHA HECM limit ($970,800 in 2022), or the sales price (applicable to HECM for Purchase loans only)

HECMs represent the bulk of reverse mortgages that lenders offer on homes valued up to $970,800—above that, you'll need a proprietary or jumbo reverse mortgage.

What Is an HECM for Purchase?

An HECM for Purchase is a home equity conversion mortgage that you can use to buy a home. Like standard HECMs, the 62-and-up age restriction applies, and you don't have to repay the loan until you sell the home, move out, pass away, or fail to meet the loan obligations (e.g., fall behind on your property taxes or homeowners insurance). The home that you buy with proceeds from an HECM for Purchase must be your principal residence that you occupy within 60 days of the loan closing. HECM for Purchase closing costs are higher than those for other reverse mortgage loans. They include an up-front mortgage insurance premium equal to 2% of the property's value, plus various lender and third-party costs like loan origination fees, title insurance, appraisal fees, credit report fees, and recording fees. Unlike a regular HECM, you'll also need cash on hand to cover a sizable down payment. Overall, your up-front costs could run from 29% to 63% of the home's purchase price, depending on your age. For HECM for Purchase loans, you need to pay the difference between the HECM loan proceeds and the home's sale price, plus any closing costs. The funds can come from your savings or the sale of your previous home or personal assets (e.g., stocks)—but you can't use "gap financing" or other types of interim financing like a credit card cash advance or seller financing. The money that you receive from a reverse mortgage generally is not taxable and won't affect your Social Security or Medicare benefits.

HECM for Purchase Down Payment Examples

Here are some examples showing the required minimum down payment for an HECM for Purchase loan, according to the National Reverse Mortgage Lenders Association:

Mortgage lending discrimination is illegal. If you think that you've been discriminated against based on race, religion, sex, marital status, public assistance, national origin, disability, or age, file a complaint with the Consumer Financial Protection Bureau (CFPB) or the U.S. Department of Housing and Urban Development (HUD). Second requirement is that you either have the chase to put down or have a property with enough equity so you have the cash required to benefit from a reverse purchase. If you are unsure of the equity available to you visit Home Value SoCal to instantly determine your homes value in 15 seconds or less. 

HECM for Purchase Eligible Properties

Any home that you buy with an HECM for Purchase must meet FHA property standards and flood requirements. Eligible property types include:

• Single-family homes (one- to four-unit properties)
• Manufactured homes (built after June 1976)
• Condominiums
• Properties in planned unit developments (PUDs)
• Townhouses
• New-construction homes with a certificate of occupancy (CO) issued by closing

Can I use a reverse mortgage to buy a home?

Yes. You can use an HECM for Purchase reverse mortgage to buy a principal residence. To qualify, you must be at least 62 years old and have cash available to cover the down payment and closing costs.

What is the difference between a home equity conversion mortgage (HECM) and a reverse mortgage?

A reverse mortgage is for homeowners ages 62 and older who want to tap into their home equity without selling or moving. A home equity conversion mortgage (HECM) is the Federal Housing Administration's (FHA's) reverse mortgage program, representing the bulk of the reverse mortgage market. HECMs are the only reverse mortgages insured by the U.S. government.

What are the age restrictions for getting a reverse mortgage?

Homeowners must be at least 62 years old to qualify for an HECM, the most common type of reverse mortgage loan. Still, some proprietary (or jumbo) reverse mortgages are available to homeowners as young as age 55.

The Bottom Line

Reverse mortgages—including HECM for Purchase loans—involve substantial costs, making them a poor choice for many older adults. Some less expensive options include mortgage refinancing, home equity loans, or downsizing and pocketing the extra proceeds. Still, if you decide that a reverse mortgage makes financial sense for you, shop around to compare costs. Mortgage insurance premiums are generally the same across lenders, but expenses like loan origination fees, closing costs, servicing fees, and interest rates tend to vary.