Reverse Mortgage Loans: Guidebook for Builders

REVERSE MORTGAGE LOANS

Guidebook for Builders

Home Builders:

Boost Your Senior Buyers’ Purchasing Power With Home Equity Conversion Mortgage for Purchase (H4P) Loans

INSIDE: How incorporating H4P loans into your business can enhance your value proposition to a growing market segment of homebuyers 62 and older.

• Increase your buyer’s purchasing power

• Increase referrals and foot traffic

• Overcome price objections

• Experience fewer underwriting denials

• Sell homes faster

• Sell builder upgrades

The Opportunity

According to a recent study from the National Association of Realtors®, baby boomers (58 to 76) have surpassed millennials (24 to 42) as the age group buying the most homes, now accounting for 39% of all homebuyers. An advantage most older-adult homebuyers have, especially in a competitive housing market, is they’ve built more housing equity over their working lives. The net proceeds from selling their current home can propel them into their next home.

U.S. homeowners 62 and over are sitting on an impressive amount of home equity — now estimated at over $12.3 trillion.†

At Fairway, we see many older-adult clients looking at new construction, whether a 55+ community or a typical one. Seniors are on the move, which means opportunity is knocking for builders like yourself.

You likely have many older-adult buyers dreaming of moving to one of your communities, moving closer to their family and friends or moving out of an empty nest into your newest model. These folks would like to swap the struggles of keeping up with an older home for the comforts of low-maintence living in a new construction home, with builder upgrades optimized for their current and future needs and wants. All these buyers, even the ones with the means to pay all cash for their next home, could benefit from a Home Equity Conversion Mortgage for Purchase loan, or an H4P loan for short. The loan is also sometimes called a reverse mortgage for home purchase loan.

While paying all cash or taking on a new mortgage that requires monthly principal and interest (P&I) mortgage payments are viable funding options for homebuyers 62 and older, read on to see how H4P loans offer them the best of both worlds.

“I would not have qualified for a mortgage at my age and without a

job.”

“I had sold my home quite a few years ago, and I had really found that I wanted a little house. [I felt] that I could never have a house again. . . . This was something I could have never done without the HECM mortgage program. With this [house] being half price, I still managed to have enough left over that I could buy new furniture and get my own hot tub in the backyard.”

“I’ve been telling people about it. I’m not shy about telling them, ‘You won’t believe the deal that I got this house!’ It’s a fabulous program for older people.”

– Mary Jo Giamberardini, Customer

How an

H4P Loan Works

Buying a home using an H4P loan is quite simple. To put it briefly, H4P loans are a way for older adults to purchase a new home in lieu of a traditional mortgage to finance part of the home’s cost.

Unlike a traditional mortgage, with an H4P, the loan balance doesn’t have to be repaid until the last surviving borrower moves out of the home, passes away or fails to comply with the loan terms. Like a traditional mortgage, the critical property charges, like taxes and insurance, must be paid, and the borrower must put down a portion of the purchase price to supplement the financing.

Consider this: If your buyers don’t necessarily have to pay the full price in cash to achieve no required monthly P&I mortgage payments, wouldn’t they want to hear about that option?

An H4P loan allows your buyers

62 and older to:

• Enhance liquidity by not making an all-cash purchase. Your buyer can keep more of their productive assets to use as they wish rather than tying them up in real estate.

• Increase monthly cash flow. Taking on a new mortgage without having to take on monthly P&I mortgage payments can be a game changer for your buyers’ retirement cash flow strategy. (Your buyer must pay property charges, like taxes and insurance.)

• Buy the home they want. Your buyers will have increased buying power to purchase their ideal home from you with the builder upgrades they need or want. Also, they may be able to sell their

*The required down payment on your buyer’s new home is determined on a number of factors, including their 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.

departure home faster, as they won’t necessarily have to wait to get the highest price for the home they’re selling to secure their next home.

• Put down as little as 40%-70%* of the purchase price at closing. Your customers can buy their next home with much less upfront money than if they were to pay the entire purchase price outright. To pay for the down payment, the funds can come from their last home’s sale proceeds, 401(k) and other sources that meet the U.S. Department of Housing and Urban Development (HUD) and lender guidelines.

Benefits for you and your business:

• Set yourself apart from the competition. Be the first builder in your local market to educate consumers.

• Increase buying power. Your buyers will have increased means to purchase their ideal home. You can make buying a higher-priced home with the upgrades/amenities they want or need easier to afford, resulting in average price increases and happier buyers who get more for their money.

• Capture new customers. Many seniors don’t want a monthly mortgage payment (property taxes, insurance, HOA dues, maintenance fees, etc., must always be paid) but are hesitant to use the majority of their assets to purchase a new home in cash.

• Experience fewer underwriting denials. Credit and income requirements tend to be less restrictive than a traditional mortgage.

UPSIZE to a New Home

Step 1:

Sara sells her existing home and nets $450,000.

Step 2:

Sara finds the home she wants in your community, with the upgrades she desires, for $600,000.

Sara, 70, recently retired and is considering selling her outdated, paid-off home, which she expects will yield net proceeds of $450,000. She has $300,000 in a retirement savings account and has a $3,000 monthly income from Social Security and pension.

She has her eye on a beautiful, new construction home in your community (valued at $600,000). She believes her options to fund the purchase of that home are limited to:

• Paying cash. This option requires her to tie up a big chunk of her savings and possibly all the net proceeds from the sale of her existing home in real estate, a very illiquid asset.

• Taking out a traditional mortgage. While she’d initially be required to put less money down with a traditional mortgage, the required monthly P&I payments could add up to a significant cash outlay over time, throwing a wrench into her retirement cash flow strategy.

Sara fears outliving her savings and wonders if her dream home should remain a fantasy.

You suggest she look into an alternative financing option, an H4P loan. After you explain a little about the loan product and give her Fairway’s “62+ Homebuyer’s Guide,” she’s intrigued, and you introduce her to a Fairway loan officer.

Sara uses $381,000 from her home sale proceeds as the down payment and $219,000 of H4P loan proceeds to achieve the $600,000 (plus closing costs) needed to complete the purchase.

Step 3:

Sara moves into her new home, keeps $69,000 of the net proceeds from the sale of her previous home to use as she wishes, doesn’t have to touch her retirement funds to close the deal and isn’t burdened by mandatory monthly P&I mortgage payments (she still must pay critical property charges, like taxes and insurance). To her, it feels like an all-cash purchase, except she can now keep more of her productive assets liquid to help fund her retirement.

DOWNSIZE to New Home

Step 1:

James and Mary sell their existing home and net $630,000.

Step 2:

They find the home they want in your community, with the universal design upgrades they desire, for $500,000.

James and Mary use $336,000 from their home sale proceeds as the down payment and use $164,000 of H4P loan proceeds to achieve the $500,000 (plus closing costs) needed to complete the purchase.

Step 3:

James and Mary move into their new home, bolstering their retirement account (from $800,000 to $1,094,000) and avoiding a mortgage with required monthly mortgage payments (they must pay the property charges, like taxes and insurance). They now look forward to enjoying retirement and aging comfortably in place with fewer financial worries.

James and Mary, 68 and 65, find that the large home where they raised their four children is no longer ideal. They want to move into one of your newly constructed homes (with a main floor master bedroom) at a 55+ Active Adult community to retire. Your base model is $450,000. They expect to net $630,000 from the sale of their current home and would like to put much of that toward their retirement account, which totals $800,000. They understand the opportunity costs of paying all cash for the home, and they aren’t interested in taking on a mortgage with mandatory monthly P&I payments. You suggest they look into an alternative option, an H4P loan. After you explain a little about the loan product and give them “Fairway’s 62+ Homebuyer’s Guide,” they’re intrigued, and you introduce them to a Fairway loan officer.

Eligibility Requirements

Like any mortgage, with an H4P loan, there are qualifications and requirements that the prospective borrower must meet to qualify for the loan.

Age

Here’s a case where your buyer’s time on this planet has big advantages. Only one homeowner has to be 62 or older (a borrower isn’t eligible to complete the loan process until they officially turn 62).

Residency

The borrower has to move in within 60 days of buying the home, which they must use as their principal residence. The H4P program has an annual certification process in which the borrower must confirm that the home is still their primary residence.

Credit

The borrower must meet minimum credit requirements and not be delinquent on any federal debt. Credit matters because the H4P loan must be a sustainable solution. Even though an H4P loan doesn’t require monthly P&I mortgage payments, the borrower must be able to pay the ongoing property-related bills and dues, such as taxes, insurance and HOA dues. Failure to meet these mandatory obligations may cause the borrower to default on the mortgage.

That said, it’s generally easier for older-adult homebuyers to qualify for an H4P loan than a conventional mortgage. With an H4P loan, there is no minimum credit score requirement. However, the lender will conduct a financial assessment of your buyer’s credit history, property charge history and monthly residual income when deciding whether to approve their loan.

Property Types

Here’s a list of the generally accepted (and generally not accepted) property types for the H4P product:

Generally Eligible

• Single-family residence

• 2- to 4-unit properties

• Some manufactured homes

• Modular homes

• Planned unit developments (PUDs)

• Townhomes

• Approved condominiums

• New construction homes

Generally Ineligible

• Mobile homes

• Cooperative units

• Commercial properties

• Working farms

• Investment or second homes

• Condo projects less than two units

• Condos not on the approved list

• Properties on Indian reservations

Attend a Financial Counseling Session

The borrower must attend a counseling session. The counseling session’s main objectives are to ensure your buyer fully understands the loan program and to help them determine if it’s a good fit.

Counseling is conducted by a U.S. Department of Housing and Urban Development (HUD)-approved independent third party and can be done in person or over the phone. All borrowers and co-borrowers must attend the session. There are situations where others must also attend, such as a power of attorney for an incompetent borrower. The borrower’s family members are encouraged to attend.

Down Payment / Loan Proceeds

A borrower using an H4P loan must make a minimum required down payment (a certain percentage of the sales price per the loan terms, usually 40%-70%*) at closing from a qualifying source(s), such as from the sale of their home.

When calculating the amount of H4P loan funds available to the borrower (and, consequently, the amount of down payment funds that will be needed from the borrower), the expected interest rate (the 10-year Constant Maturity Treasury plus the lender margin) plays a role, along with the youngest borrower’s age and the value of the purchased home up to the H4P loan limit.

Generally speaking, the lower the expected interest rate and the older the youngest borrower is, the less funds (as a percentage of the total sales price) the borrower will need to bring to closing as a down payment.

This table shows the estimated loan funds available (expressed as a percentage of the home purchase price) from utilizing an H4P loan to buy a new home.*

Purchase PriceEstimated Cash From Borrower Needed to Close (Closing Costs Not Included) = Estimated Reverse Mortgage Available Funds*

*Loan proceed percentages are based on home values up to the FHA limit of $1,089,300 and expected interest rate of 7.125% as of 10/17/23. † This information is provided as a guideline and does not reflect the final outcome for any particular homebuyer or property. The actual reverse mortgage available funds are based on current interest rates, current charges associated with loan, borrower date of birth (or non-borrowing spouse, if applicable), the property sales price and standard closing cost. Interest rates and loan fees are subject to change without notice. Following the closing of the home purchase, no further principal or interest payments will be required as long as one borrower occupies the home as their primary residence and adheres to all HUD guidelines of loan. Borrower must remain current on property taxes, homeowners insurance (and homeowner association dues, if applicable) and home

The Loan Balance, Interest and Repayment

As you know, a higher interest rate affects buyers using a traditional mortgage by way of a higher required monthly P&I mortgage payment.

The H4P loan can be either a fixed or variable interest rate. The borrower can repay as much or as little toward the loan balance each month as they want or choose to make no monthly mortgage payment (must pay property-related charges, like taxes and insurance). In other words, the interest rate doesn’t affect how much a borrower must pay each month because they can pay as little as $0 monthly.

That said, an H4P loan is borrowed money, and any borrowed money not yet repaid accrues interest. If the borrower opts to make no voluntary prepayments, the interest (and any fees) gets tacked onto the loan balance. In other words, the loan balance will grow over time (the higher the interest rate, the faster the balance will grow), which can chip away at equity in the home.

While your buyer’s home equity may decline over time, their total net worth may not, as they’ll have freed up cash flow to manage, save and potentially grow.

The H4P loan becomes due and payable when one of the following maturity events occurs:

• The property is no longer the principal residence of at least one borrower. For example, an H4P loan becomes due and payable if the last remaining borrower passes away or permanently moves to a nursing home. (Note: The due and payable status of the loan may be deferred in certain situations in which an eligible non-borrowing spouse is involved.)

• A borrower doesn’t otherwise fulfill their obligations under the loan terms. For example, an H4P loan becomes due if the borrower fails to pay their property taxes in a timely manner, a requirement for loan term compliance.

When an H4P loan becomes due and payable, it’s typically satisfied via the sale of the home. Unlike a traditional mortgage, an H4P loan has a built-in feature that protects the homeowner and their heirs from being upside down on the loan. Even if the H4P borrower defers the loan balance for a long while, and the property value is worth less than the loan balance, the home sale will always satisfy the loan. Thanks to the loan’s FHAinsured non-recourse feature, the home stands for the debt, not the borrower nor the heirs.*

After the borrower passes away, here are options for the heirs:

• Sell the home and pocket any profit

• Sign a deed-in-lieu of foreclosure and walk away from the home (when they don’t want the home and there is no financial benefit from selling the home, utilizing the non-recourse feature)

• Pay off the mortgage balance and keep the home Obtain a short payoff of 95% of the current home value (when they want to keep the home and the loan balance exceeds the home value, utilizing the nonrecourse feature)

*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.

Answers to

Frequently Asked Questions

Are seller concessions allowed?

Yes. The FHA now permits interested parties (property sellers, real estate agents, builders or developers) to contribute up to 6% of the sales price on H4P transactions. The 6% limit on interested party contributions may be applied toward the cost of origination fees, other closing costs paid outside of closing (e.g., credit report and appraisal), payment of the initial mortgage insurance premium and more.

What source of funds (money) are allowed when my client

purchases a home with an H4P

loan?

The money must come from your buyer’s liquid assets (e.g., bank accounts, CDs, retirement accounts) or the documented sale of other assets they may have (e.g., their current home).

Is there a Mortgage Insurance Premium (MIP)?

Similar to a traditional FHA mortgage, your buyer must pay upfront and ongoing mortgage insurance premiums (MIPs). This premium is usually financed into the loan and not paid out of pocket. Its purpose is to fund the nonrecourse feature, protecting them and their heirs from being stuck with a bill if their loan balance exceeds what their home sells for when the loan matures and is due and payable.

Initial MIP is the lesser of 2% of the home value, or 2% of the HECM limit (currently $1,089,300).

For example, if the home value is $423,000, then after calculating 2% of $423,000, your buyer’s initial MIP cost would be $8,460.

Annual MIP is calculated at 0.5% of the outstanding mortgage balance.

Can your buyer start the H4P application before the home you are building is complete?

Yes, they can complete the H4P application and begin the process of securing the loan, but the appraisal, and consequently the loan closing, cannot happen until the certificate of occupancy (or equivalent) has been issued. Once the certificate of occupancy has been issued, the application will be finalized, and the appraisal and title documentation will be ordered.

How fast does an H4P loan typically close?

An H4P loan from Fairway usually closes in a similar timeframe to a traditional mortgage and includes the usual steps, like pre-qualification, inspection, appraisal and underwriting. Fairway will walk your client through every step of the process to help ensure on-time, speedy funding.

About Fairway

At Fairway Independent Mortgage Corporation, customer service is a way of life. We’re dedicated to finding great rates and loan options for our customers while offering some of the fastest turn times in the industry. Our goal is to act as a trusted advisor, providing highly personalized service and helping you and your buyers through every step of the loan process. It’s all designed to exceed expectations, provide satisfaction and earn trust. Since opening our doors more than 25 years ago, our team has helped thousands of Americans achieve their dream of homeownership. Partner with an H4P lender you can trust!

FHA-insured financing via H4P loans is only available through Fairway and other select FHA-approved lenders. We make it easy for you to enhance your value proposition by incorporating H4P loans into your business. We’re happy to provide seminars to educate your sales team and clients and can provide co-branding material, like event fliers and banners, so your sales team can continue to do what they do best — sell!

After you speak to your client about the exciting H4P option, a best practice is to give them our “62+ Homebuyer’s Guide,” which explains what they need to know about buying a new home using an H4P loan. From our initial consultation with your client through closing and beyond, you can rest assured they’ll be in good hands.

At Fairway, we share your commitment to helping older Americans enjoy the quality retirement housing lifestyle they desire and deserve.

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