Can You Buy A Home Using A Reverse Mortgage?

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An open Q&A

Welcome to Mortgage Mom Radio. I'm Debbie Marcoux, I am the Mortgage Mom, and today the show is all Q&A. I want you to ask your questions, I'm going to read them out loud, and I'm going to answer them for you. There is no particular subject, and nothing is off the table.

This is about everything — all things real estate and mortgage. Whether you're buying a home, selling a home, moving out of state, trying to get cash out of your property, refinancing, needing to buy another person out, wondering about equity lines and equity loans, or looking at a reverse mortgage. And a reverse mortgage can be done as both a refinance and a purchase — a lot of people don't know you can buy a home using a reverse mortgage. Or where I think rates are going, or whether you should buy today. All topics are open.

Q&A: do you do reverse mortgages?

Diane asks: “Do you do reverse mortgages?”

Yes, we do offer reverse financing. There is a minimum age requirement, and it applies to everybody who will be living in the home, on the title of the home, and on the loan. So if you're married, we're going to look at both of you, and whoever is younger has to hit that age.

Reverse mortgages are based on your age and what they believe the life expectancy to be. The older you are, the higher the loan-to-value — the higher the loan balance you can carry against the value of the property. You have to remember that on many reverse mortgages there isn't a monthly payment being made, so your balance is actually going backwards, in reverse, rather than being paid down and moving forward. So the longer your life expectancy, the higher that balance can get, which becomes risk to the bank — and that's why they lower the amount of financing available the younger you are.

Q&A: buying a home with reverse mortgage financing

Diane follows up: “Please share how a person could purchase a new home with reverse mortgage financing.”

Okay, we're on reverse today. I like it.

When you buy a home, just like you would with a normal loan, you've got a down payment you'll put on the property. Let me throw out simple numbers we can all follow. Say you buy a home for $500,000 and you're going to put down $250,000 — fifty percent of the house. On a normal loan you'd get a $250,000 mortgage, it would be amortized over 15, 20, or 30 years, and we'd figure out your monthly payment to get that balance paid off.

On a purchase with a reverse mortgage, it's much the same, except the amount of down payment required is determined based on your age. So you put down the amount you need to put down, you get the loan from the bank for the other portion, which pays off the seller — and now your reverse mortgage starts rolling backwards instead of forward. Every month you carry that reverse mortgage, you're going to owe a little bit more, and a little bit more, and a little bit more. But the opportunity is there to do a reverse mortgage on a purchase just as well as on a refinance.

I actually really like the product. I think it's fantastic, especially for somebody who is going to use their property as their main source of retirement. If you've got other ways to make payments — pensions, Social Security, retirement income — and you don't need to do a reverse mortgage, then obviously you want to keep your assets intact. But if that property is your form of retirement, if it's the vehicle that's going to keep your lifestyle the same as what you're used to, a reverse mortgage is absolutely a great opportunity.

Later in the show Diane added that she thinks it's a great product, and I agree. It has a badly tarnished name, and maybe in the past it wasn't the greatest of programs — but there has been a lot of regulation since the financial crisis. It really is a good program and it really does help, or could help, a lot of people who haven't looked into it, or who are a little worried or scared of it.

Q&A: what has to happen for rates to come down?

A listener asks: “What exactly has to happen in the world and/or country in order for interest rates to come down? What's the remedy, if there's nothing we can do as taxpayers?”

That's a little more on the level of probably not okay for me to get into on radio. I don't want to get too far into the politics of what needs to happen — I definitely want the show to stay on radio. But at the end of the day, in order for them to bring down interest rates, the way they explain it is that we need to get inflation under control. Right now they're raising rates to try to bring inflation down, to get to a level where they can stabilize, level off, and start bringing rates back down again. That is the very PC answer.

Do I particularly think we're going to see rates drop any time soon? That's a negative, I don't. Do I think we're going to see rates continue to go up? Yes, I do. I think they climb a while longer, then things level off, and after leveling off for quite some time I think we'll start to see them come back down.

I do not think we're ever going to see interest rates in the twos and three percents again like we did. That was a pandemic. That was something never heard of. I just don't see us rolling into another one any time soon. I don't have a crystal ball — I guess it could happen. But normal rates, if I had to put my finger on it after doing this for the last 28 years, I'd say we probably eventually see rates come back down into the five range: five and a half, five and three quarters, five and a quarter. I do think we'll eventually get there, but I don't personally think that happens until probably sometime in 2024. So we're going to feel a little pain over the next twelve months or so — maybe six months where they keep raising them, then level off for a bit, and maybe about a year from now we might start to see them come down. But as soon as rates start to come down, we're going to start to see property values increase again, and then they're going to keep going.

Q&A: mobile homes and first-time buyer status

David asks: “I've only ever lived in a mobile home in a park. Do I still qualify as a new home buyer?”

Great question, and it comes up quite often. You are considered a first-time buyer if you have never held real property. That's the big question mark around mobile homes: many times a mobile home is personal property, not real property. You're leasing the land your unit sits on, and the home hasn't had the work done to permanently affix it to the foundation.

Now, if it has been permanently affixed to the foundation, and you get a property tax bill from the county — even if it's for a thousand or fifteen hundred dollars a year, even if it's five hundred or two hundred dollars for the year — then they're considering that to be real property. So the question is: have you had your HUD tags done, or do you still have DMV plates? That's probably the easiest way to explain it.

There's a good chance you're still considered a first-time buyer, and there's a good chance you're not. If you're wondering and you want us to pull up the information and tell you the answer, give us a call. I can't look up you and your information, but I can look up your property address and tell you whether it's currently being taxed as real property — and that gives you your yes or no.

Q&A: HELOC or home equity loan?

A listener asks: “I'm looking at a HELOC. I've also heard the word 'HE loan.' What is the difference, and which one is better?”

An HE loan — a home equity loan — is a fixed rate loan. A home equity line of credit is an adjustable line of credit. Both are second mortgages, both are liens against your property in second position if you currently have a first mortgage. There is an opportunity to have a home equity line or loan in first position, but that would be somebody who doesn't have a mortgage currently. Most of the time they're in second lien position.

A home equity line of credit is a lot like a credit card. You have an open available line of credit, you can borrow against it and pay it back, borrow against it and pay it back, and you only pay on the balance you owe. The monthly payment is interest only — which means the payment you make will not pay the balance down on your mortgage, not even a dollar, unless you pay more toward that payment every month. And it's an adjustable rate, so as the Federal Reserve increases the prime rate, the rate on an equity line will continue to go up, and you'll pay more in interest over time as they keep raising rates.

A home equity loan is very much like a mortgage or a car loan: a particular amount of money, over a particular amount of time, at a particular interest rate, and every payment you make pays down the balance you owe. It's basically a second loan.

Q&A: price cut or buydown?

Roger, a real estate agent in Las Vegas, asks: “I hear it may not be to a buyer's advantage to offer $10,000 less, only saving a small amount in payments — that a 2-1 buydown using a seller credit would be more helpful to the payments. What do you think?”

I agree with what you've heard. I do believe that buying your interest rate down for the first year or two is a significantly different amount of savings than just lowering the price on the home. If you're going to get rid of ten thousand dollars worth of interest by buying the rate down, that is quite a bit different as far as the savings go. It's not something I can do here in studio and show you the calculation on, but it is definitely better for a buyer to get a lower interest rate with a seller credit than just a lower price on the home.

If you're paying cash for the property, obviously you want the lowest price you can get. But the majority of the nation are getting mortgages when they purchase, and the difference in interest you'll pay between five percent and six percent, or six percent and seven percent, is a pretty big chunk over a 12- or 24-month term.

I did my show last week on buydowns and what buydowns are. Let's say we do a two-year buydown: if rates are approaching seven, your first year is at five, the second year the rate is six, and it's not until the third year that it gets to seven. If rates do come back down as inflation gets under control, we get you refinanced into a more permanent solution.

[Debbie also announced on this show a limited promotion for the month of October 2022, in which Mortgage Mom Radio would fund a first-year rate buydown on behalf of buyers and sellers working with the team. That promotion has expired and is included here only as part of the record of the episode.]

Q&A: does solar add value?

Karen asks: “Does solar add to the value of the home?”

If my house is on the market and my neighbor's house is the exact same model match — we're in a cookie-cutter community — and I have solar and they don't, that could be very appealing to a buyer and help me sell over the other house. That's assuming my solar is owned free and clear, that it's not on a lease with a monthly payment a new buyer would have to take over.

Is it going to give me a little bit of equity? Sure. Is it dollar for dollar for what I put into it? No. If the last home that sold in the neighborhood was a model match without solar and it sold for $500,000, you might get $510,000 for yours. So you're not getting dollar for dollar. It's very much like a pool: it makes your home more desirable, you will get a bit more for it, it's more attractive to a buyer — but not dollar for dollar.

And that goes for all upgrades. You paint, you landscape, you redo the kitchen, you put in all new appliances, you put on a brand new roof. Yes, it makes the home more attractive. Yes, it'll go for more money than the fixer-upper down the street. But are you going to get dollar for dollar out of your improvements? You're not.

Q&A: can I refinance later?

A listener asks: “If I purchase a house in a month and have a six percent interest rate, would I be able to refinance next year when rates go down? How long do I have to wait?”

Number one, you can always refinance. But by the way — we're not at six percent today. I'm just going to throw that out there. We're probably closer to seven percent on a conventional loan. If anybody's talking to you about fours and fives, they are definitely not talking about a normal 30-year fixed rate; they're probably talking about an adjustable, a 15-year, a 20-year, or one of the many other programs out there. A standard Fannie Mae or Freddie Mac 30-year fixed conventional mortgage, not paying any points, is approaching seven percent if not already there — and it depends on the property type and your credit score. If you've got the best of all worlds, a big down payment, a fantastic credit score, a single-family property, not units, not a condo, you might be in the high sixes right now without buying anything down. Every commercial you see and hear will be quoting rates that involve paying points.

So let's back the truck up and really start at seven percent. If I get into a mortgage right now and the rate is seven percent, can I refinance if rates drop? Yes, you can — as long as you don't incur any extra debt.

What does that mean? As long as your qualifications don't change. Your income stays the same or better. You've got a job today, you get a raise, or you get offered a new job at a higher amount. Your monthly debts stay the same. You don't go rack up a bunch of credit cards because you decided to buy all brand new furniture for the house. You don't start taking out personal loans to renovate the kitchen. As long as income, credit, and debts remain relatively the same, if you could qualify to buy, you should not have any problem doing a refinance.

What are the situations where it might not be possible? Many of you have heard of down payment assistance and want to take advantage of it. Keep in mind that the large majority of those programs are going to require, if it's a grant, that you cannot refinance or sell the property within a particular amount of time, or you have to pay back what they granted you. And many times it isn't a grant — it's a loan. So now you have your first mortgage, and you additionally have an extra loan that may or may not be forgiven; sometimes it's forgiven after a certain number of years, and sometimes it has to be paid back.

If you owe more on the house than what it's worth, we are not going to be able to do that refinance. But if you buy the home for $500,000 and you put five percent down, and your income stays the same and your credit stays the same and your debts stay the same, and rates happen to drop from seven percent to five percent — let me tell you, 95% loan to value, rate and term, not trying to take any cash out of the house, we can do that refinance all day long. So yes, you can absolutely refinance later if rates drop.

Q&A: will it ever be reasonable for Gen Z to buy?

A listener asks: “Do you think home prices or interest rates will ever come down to make it reasonable for Gen Z to buy homes?”

I do think we're going to see property values come down — they've already kind of started to. They're not going crazy, things haven't exploded, the floor hasn't fallen out. What we're starting to see is sellers being willing to give incentives: money to cover your closing costs, money to buy down the interest rate to make the monthly payment more affordable. We're not necessarily seeing prices drop a lot, barely if at all.

I do think we'll see rates come back down again, probably a year, year and a half out. But at that point, if we did get a little back in value, if values did drop a bit, we're going to see them go right back up.

Think about it this way. Property values go up, property values come down. It's a cycle, it goes around in a circle. As we go through life we go up, we come down, and the next time we go up even further, then come back down. So do I think you're ever going to get the opportunity to buy a house at the same price I bought a house? No, I don't. I don't think that's going to happen. But I do think there are going to be points of affordability where it would be easier for you to refinance into a better monthly payment.

If you buy a home today at today's prices and today's rates, and then values drop, you could always refinance to take advantage of a lower rate and make the home more affordable. If instead you put yourself on hold and say I'm not buying until rates come down — that's not a good idea, because when rates come down, just like what we saw over the last couple of years, demand increases. More people start shopping, more people are out trying to get homes, and you're going to see the bidding wars happening again. Any small amount of depreciation that has happened will escalate away, very quickly, and property values go right back up.

So: if rates come down, it creates demand, and more homes sell at higher prices. If rates stay high, property values come down a little like they have been, you get a better deal, and you get incentives from a seller to get their home sold. I really believe your very best time to buy is now. Get into the home now, even if the rate is a little higher than you wanted. Do a buydown — get the seller to pay some money to buy your rate down — get a nice affordable payment for the next 12 to 24 months, and when rates come back down, refinance into your permanent financing. That would really be my suggestion.

Buy property for your kids

Here's my suggestion, and this is just me, this is the Mortgage Mom talking from my heart, as a mother of kids who are Gen Z and on the cusp of millennial.

If you have a child right now and you're concerned about whether homes are going to be affordable someday, whether you'll be able to put them through college, whether you'll be able to pay for a wedding — how do you make that happen when prices just continue to go up? Remember: cyclical. They go up, they go down, but every time they go up they go up even higher, and when they come down they don't go down as low. Think of it as a slinky, spiraling upward.

So instead of only putting money into the usual savings funds, take the money and buy property. Buy an investment property. Imagine what that property is going to be worth in twenty years if you have a baby today. Imagine what you can do with it then. Can you refinance it to get the cash out to cover their college tuition? If they were getting married and couldn't afford to buy, would it be a home you could hand to them? Property and real estate is the way to go. Buy what you can. Create a portfolio. If you can take cash out of your home to buy another home, do that. If you can muscle up five or ten percent to buy yourself a new home and make your current one the rental, do that.

That's my opinion of the day. And I want you to do the research — I'm not even going to throw numbers out there. Look at the house you're living in, whether you own it or rent it. Look it up. What was that property worth eighteen years ago, sixteen years ago, twelve years ago — however old the kid is you're thinking about? What is it worth today? Could you use that property to get cash out for a wedding, for college, for a home for them to start their family in? It's just something I want you to think about: how can I hedge against inflation for my family?

Q&A: is owning a sinkhole too?

A listener asks: “We know rent is 100% a sinkhole — $2,800 in rent a month goes absolutely nowhere for the renter. That being said, how much of a sinkhole is it for homeowners?”

It depends on every person, on your income level, and on what your deductions give you as an owner. But think of it this way: you own the home. You get the property tax deduction. You get the mortgage interest deduction. It is your home, it's giving you a place to call yours, nobody can tell you to move, and as long as you make your payments on time nobody can kick you out. You get to make of it what you want. It is a security blanket and it is a financial investment into the future.

I don't believe buying a home is a sinkhole in any way. Obviously there are movies like The Money Pit, which was a fun movie back in the eighties, but that's not a normal situation. We're not usually all buying a house for pennies on the dollar and then finding hundreds of thousands of dollars of repairs. Most people know what they're buying, they're getting inspections. Normal overall maintenance is something we do want to budget in when we talk about what you can afford — we want to make sure you're prepared for homeownership and you understand your obligations as a homeowner. That is why I do the homebuyer workshops.

Q&A: a loan with no proof of income

Joey asks: “I just heard about the loan that doesn't require proof of income. I'm recently back in the job market and do not have one, let alone two, years of proof.”

Yes — that's a program we rolled out about two or three weeks ago. It's for a primary residence or a second home. It is not stated income; it is literally no income. We are not qualifying you with income in any way, and we are not even saying where you work.

You do need a bigger down payment. If you have three percent or five percent or ten percent down, this is not the program for you. This is for somebody where we're using common-sense underwriting: they have the assets in the bank, they have the credit score required, and they have reserves after down payment and closing costs. We're approving them based on assets. They've got significant savings, they're trying to buy a house, they're going to put down twenty percent, they have a strong credit score, and they've got money left over for a rainy day when things go backwards. That's the loan program for them.

But do remember: when we don't verify income, we're not looking at your tax returns or your W-2s, and we can't verify that you make money to make a payment. That is a riskier loan, so it comes with a higher interest rate. If a 30-year fixed rate mortgage today is approaching seven percent, a program like that would probably bring you around eight, eight and a half percent somewhere in that mark. But it gets you into a home, it gets you your property, and you can always refinance once you have your one or two years of income under your belt, depending on your situation. It's a great opportunity to get into a property short term and then fix the permanent solution at a later date.

Wrap-up

I have definitely run out of time and I'm not going to be able to answer any more questions today. If you want to be part of the show on Wednesdays and interact with us live, subscribe on YouTube, or listen on the podcast. We're standing behind our community, our real estate agents, and everybody in the business. We want to see everybody buy, we want to see everybody sell, we want to see everybody get done what they need to get done — and the way you do that is to call us first. It's 844-935-3634, that's 844-WE-LEND-4. I'll be back next week. Talk to you all real soon.