How Reverse for Purchase can help baby boomer borrowers
Older Americans are sitting on more than $12 trillion in home equity, according to the National Reverse Mortgage Lenders Association (NRMLA)/Riskspan Reverse Mortgage Market Index. These homeowners are seeking different retirement solutions to help allocate their home equity and make it more durable over the next 20 to 30 years.
According to data from Statista, there were roughly 5.95 million homes bought and sold in the U.S. last year. The National Association of Realtors (NAR) estimates that baby boomers made up roughly 39%, or 2.32 million, of those homes.
If we then look at data from the Federal Housing Administration (FHA), there were 2,063 Home Equity Conversion Mortgage (HECM) for Purchase loans endorsed in 2022 — less than 1/10th of 1% of homes sold last year.
Today’s market includes mortgage rates of above 6%, low inventory and elevated home prices, all contributing to affordability problems. 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.
With all of this in mind, why would baby boomers move into a new home, where their expenses would be exponentially higher due to higher mortgage rates, increased inflation and current economic concerns?
“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,”
“If the industry were better educated on this option, there would be a significant increase in HECM/Reverse Purchase volume. There is an incredible opportunity for growth,” he said.
Why is this market underserved?
But 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.
“Many in the housing and mortgage industries consider the reverse mortgage a niche product,” he said. “Now add the Reverse for Purchase product to the mix and you have a niche within a niche; that can make it even harder to break through.”
Few loan officers make the 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.
“We can effectively open up a new line of customers for real estate professionals with this financing,” Cooper said.
The HECM for Purchase product
The product itself is relatively simple, Cooper said. 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
HECM/Reverse for Purchase represents a big opportunity for agents, lenders and builders, as well as customers.
Real estate agents, loan officers and builders can attract customers they have never captured before. They can help mature customers who have looked at multiple homes and shown all the buying signals but never transacted — for a variety of reasons, but largely due to finances.
The HECM/Reverse for Purchase allows the customer to feel more financially secure in making that purchase — they can get the home they want, where they want it, with a bit more control over their financial situation. They’re able to keep a significant amount of their proceeds from their departure home with the flexibility to make monthly mortgage payments or not, provided they comply with the loan terms, including tax, insurance and maintenance costs.
“The opportunity to provide agents, builders and loan officers with a flexible, dynamic product that expands their portfolio to a growing and untapped market is very enticing,” Prieto said. “If you have someone over 62 years old looking to purchase a home with a traditional mortgage, I highly recommend they compare that option with the Reverse for Purchase. Once you do the comparison, you’ll notice how dynamic the program is and how well it can position someone in their retirement phase of life.”
The reverse industry has been working hard for years to educate real estate agents, builders and loan officers on the advantages of HECM/Reverse for Purchase.
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