In a traditional reverse mortgage, the borrower will face closing costs just as they would with a traditional loan. The difference is that these closing costs are typically rolled into the loan, which the borrower will probably not pay off. Typically, the person responsible for paying off the reverse mortgage is whomever the borrower has designated to settle their estate. For all practical purposes, there are no monetary requirements made on the borrower when he or she takes out a reverse mortgage.

A new type of reverse mortgage is available that allows the borrower to purchase a home with that money. Many elderly people want to stay home while they age. They don't want to move into a nursing home and they don't want to feel like they are burdening their children. However, remaining in the same home that was big enough to raise a family can be difficult as people age. Maybe the home has too many steps, or the doorways are too narrow to allow easy passage with a walker. It may be a problem as simple as a large yard that is difficult and expensive to maintain. For whatever reason, many elderly people find that they would like to move into a more manageable home.

Reverse Mortgage Purchase Option

A purchase reverse mortgage allows the borrower to buy a home under a reverse mortgage contract. This means that they will not owe anything on the loan until they pass away, move from the home or sell the home. This is a great program for older borrowers. Elderly homebuyers looking at this option should know that they will be expected to provide a down payment, even with a purchase reverse mortgage.

The amount of money required from the senior depends on the value of the home. The qualification and paperwork for a reverse mortgage is traditionally straightforward, and the method used to determine the amount of money necessary for a purchase reverse mortgage is the same. The value of the home is determined using the appraised value. Traditionally, determinations are made using either the appraised value or the sale price of the home, whichever was less. The downturn in the real estate market made this an unattractive option, so changes were made to the program.

Under the new formula, the senior has the advantage of having the higher appraised value used in determining how much of a down payment is required to purchase the home. For many homes, the appraised value is high enough that a down payment is not required.

What Should the Borrower do if a Down Payment is Required?

There are several choices to consider if a down payment is needed. Review these options and take the time to carefully weigh your financial situation.

 Sell the existing home first. It can be hard to think about being technically homeless, but choosing to sell your existing home before buying a new one makes a lot of sense. If you are moving into a smaller home, this will give you the time to pare down your essentials to what you really want and need. It will relieve much of the stress of wondering when and if your house will sell. Finally, it will ease much of the financial burden of purchasing a new home. Many seniors are able to stay with family or friends until they buy a new home.

 Consider using money from savings. Because seniors often live on a fixed income, the thought of taking money out of their savings can be scary. This is money that will be difficult, if not impossible, to replace. Taking money out of savings to make a down payment on a new home can be a smart move however. Most seniors that take advantage of a purchase reverse mortgage move into a smaller, more compact space. This means that you will probably find your monthly expenses lower than they currently are. Moving into an apartment complex or condominium also means lower maintenance expenses. In general, the money you spend on a down payment for more reasonable accommodations is money that will help free up your budget for as long as you remain in the home.

 Look at retirement options. Do you have money sitting in a 401k or other retirement vehicle that you aren't fully utilizing? Many people withdraw only the minimum amount from these accounts initially, afraid that they will run out of money. While it makes sense to be thrifty, don't make a shortsighted decision. Look at all the reasons listed above for taking money from savings and using it for a down payment. The same reasons apply for taking money from a retirement fund. As long as you are of an age that you will not be penalized for withdrawing the funds, it makes sense to use them to invest in a more practical home.