Seniors have many reasons to contemplate purchasing a new primary residence, whether to reside closer to loved ones, enjoy the convenience of single-story living or embrace a lifestyle with low-maintenance accommodations. However, despite these aspirations, many hesitate to act, citing concerns about housing costs, retirement finances and market unpredictability.
Given the significant impact of housing decisions on post-retirement life and financial stability, exploring funding options thoroughly is crucial. One such option, a Home Equity Conversion Mortgage (HECM) for Purchase (H4P) loan, is specifically designed for homebuyers 62 and older, offering a distinct set of advantages bridging the gap between cash purchases and traditional mortgages.
What Is a H4P Loan?
Regulated by the U.S. Department of Housing and Urban Development (HUD) and insured by the Federal Housing Administration (FHA), an H4P loan provides an alternative avenue for homebuyers 62 and older to finance part of the purchase price for a new primary residence, diverging from traditional mortgage options. Frequently referred to as a Reverse Mortgage for Purchase loan, the H4P loan offers distinct advantages for older adults purchasing a new home, notably providing enhanced repayment flexibility.
Top 10 Reasons To Use an H4P Loan To Buy a Home
No Mandatory Monthly Mortgage Payments
Although it’s a mortgage, an H4P loan offers this critical distinction: Borrowers are not required to make monthly mortgage payments. Instead, they must live in the home and pay essential property charges like taxes and insurance. This repayment flexibility can free up monthly cash flow, allowing homeowners to manage expenses or improve their retirement lifestyle.
The loan balance typically becomes due upon the last surviving borrower’s departure from the home or passing and is typically satisfied through the home sale.
In contrast, a conventional mortgage mandates a monthly payment covering both principal and interest throughout a predetermined period, often extending over several decades (e.g., 30 years). This repayment arrangement can significantly hinder retirement cash flow management.
For example, considering a traditional 30-year mortgage with a loan amount of $340,000 at a 7.15% interest rate, borrowers would face monthly payments totaling $2,296, accumulating to $487,041 in interest over the loan’s lifespan, resulting in a total loan cost of $827,041.
Preserve Your Cash Reserves / Retain More Financial Flexibility*
You can buy your next home outright with cash, eliminating the need for a monthly mortgage payment. Or, with an H4P loan, you can free yourself from the burden of monthly mortgage payments, where you’ll only need to put down 45%-70% of the purchase price,** freeing up more of your funds for other uses. You just need to live in the home and pay essential property charges like taxes and insurance.
By preserving more of your assets and cash flow through an H4P loan, you may be better equipped to navigate retirement risks such as soaring inflation and unexpected expenses.*
Boost Your Buying Power
An H4P loan offers increased affordability with its flexible repayment feature that can put your dream home within reach.
Watch this short clip featuring real Fairway Reverse customers who used an H4P loan to buy a new construction home with an ideal floor plan in a wonderful neighborhood.
Access a Flexible Line of Credit With Growth Potential
By opting for an adjustable-rate H4P loan to finance your next home purchase, you gain access to a valuable line of credit. This line of credit can be activated at closing by providing a down payment greater than the minimum required or by voluntarily making prepayments towards the loan balance after the closing.
The H4P line of credit offers several benefits. For example, charges accrue only on the amount borrowed from the line of credit, not on pledged funds left unused. Additionally, the unused portion of the line of credit grows at the same compounding rate as the loan balance, providing you with increased borrowing capacity over time. The line of credit is also secure, meaning it cannot be canceled, frozen or capped.
Potential Tax Benefits Await*
If you choose to pay for your next home in cash, you could miss out on the opportunity to reduce your taxable income through mortgage interest deductions, especially if you itemize deductions on your taxes. Opting for a traditional mortgage entails mandatory monthly principal and interest payments, which could make it challenging to accumulate enough in annual interest payments to justify itemizing your taxes.
Conversely, with an H4P loan, you maintain the opportunity for mortgage interest deductions while enjoying the loan’s flexible repayment feature. This flexibility empowers you to make a substantial payment toward the loan balance in a particular year without the obligation to allocate funds to the principal, potentially optimizing your tax deduction advantages compared to consistently making principal payments alongside smaller interest payments annually.
Generally Easier To Qualify for Compared to a Traditional Mortgage
Seniors facing low-income or credit challenges may encounter hurdles in securing approval for a traditional mortgage. Lenders typically assess the borrower’s ability to afford monthly principal and interest payments over the loan term, along with ongoing property charges like taxes and insurance. Credit score and monthly residual income play a significant role in the approval process.
In contrast, H4P loans offer a more accessible path for eligible applicants. These loans focus primarily on the borrower’s capacity to pay ongoing property charges without mandating monthly principal and interest payments. Unlike traditional mortgages, H4P loans don’t impose minimum credit score requirements. However, underwriting considers factors such as property charge history and creditworthiness.
Shield Against Declining Property Values***
Historical evidence demonstrates the cyclical nature of the housing market, transitioning between periods of seller dominance and buyer advantage.
Unlike a traditional mortgage, an H4P loan has a built-in feature that protects the homeowner against the risk of the home becoming upside down. The FHA insurance assures the borrowers (or their heirs) won’t be responsible for mortgage debt exceeding the home’s value when the loan matures and the property is sold. This protection remains intact even if property values crash.
Third-Party Assistance in Evaluating Its Appropriateness for Your Needs
In contrast to traditional mortgages, H4P loans require borrowers to participate in a counseling session as part of the loan process. These sessions are designed to ensure that you have a comprehensive understanding of the loan program and to assist you in determining whether it aligns with your needs. Conducted by independent third parties approved by the HUD, counseling sessions can be done in person or over the phone.
You Own Your Home
Like purchasing a home outright or through a conventional mortgage, opting for an H4P loan means you’ll have ownership rights over your home, as your name is listed on the title. Contrary to popular belief, the bank or lenders do not claim ownership of your home. This grants you the freedom to sell at your discretion, much like any other home purchase. Additionally, you can pass the home on to your heirs if you wish.
Allowable Interested Party Contributions Add to Your Options
Recently, the federal government introduced beneficial updates to the H4P program, aligning it more closely with other FHA programs. Notably, one significant change involves allowing interested party contributions, including seller concessions, which were previously prohibited.
Under these new regulations, interested parties—including sellers, real estate agents, builders, developers, mortgagees and third-party originators—can now contribute up to 6% of the sales price. This adjustment provides additional flexibility and affordability for your next home purchase.
Let’s Start a Conversation!
If you or someone you care about or advise is 62 or over and contemplating the purchase of a new primary residence, exploring the H4P financing option can be highly beneficial. Get in touch with us today to delve deeper into this opportunity.
*This advertisement does not constitute tax or financial advice. Please consult a tax and/or financial advisor regarding your specific situation.
**The required down payment on your new home is determined on a number of factors, including your age (or eligible non-borrowing spouse’s age, if applicable); current interest rates; and the lesser of the home’s appraised value or purchase price.
***There are some circumstances that will cause the loan to mature and the balance to become due and payable. Borrower is still responsible for paying property taxes and insurance and maintaining the home. Credit subject to age, property and some limited debt qualifications. Program rates, fees, terms and conditions are not available in all states and subject to change.
