The Home Equity Conversion Mortgage (HECM) for Purchase (H4P) program allows borrowers to finance home purchases with a reverse mortgage, but it comes with a few caveats, including a substantial down payment requirement, which can make it a tough sell to borrowers.
In addition to getting borrowers on board with the concept of an H4P, it can be difficult to get other reverse mortgage and real estate professionals to buy into the idea. For some industry insiders, however, the H4P is more attractive in a lower reverse mortgage market.
Due to the shifting rates that have occurred over the past several months, Curtis Mangus of Premier Mortgage Resources has seen H4P business increase. It constituted about 20% of his total reverse mortgage business in 2022, and as someone who introduces real estate professionals to the concept, he has noticed more inquiries about H4Ps.
“I’ve certainly seen an increase in interest for H4P, partly because when interest rates are at 7%, these seniors and baby boomers who need to move don’t even qualify on a conventional loan,” Mangus said. “They’re almost defaulting to H4P, if nothing else, because there’s no way that they budget for a debt ratio and a payment. So, I’ve seen an increase with real estate agents reaching out, because a lot of these clients — because of what has happened with rates — don’t qualify for a regular, conventional loan.”
Jeff Foody of Northwest Reverse Mortgage said that borrowers squeezed by rates might find the H4P product viable.
“I mean, right now we’ve been struggling with qualifying for traditional buyers, but we have a lot of people that come to the table with cash,” Foody said. “And they’re looking to buy in the $450,000 to $500,000 range. Now, they’re finding that those houses aren’t as available as they were before.”
The way the conversation usually plays out emphasizes the value proposition, Mangus said.
“My normal H4P client is around 75 years old,” he said. “If they’re buying a $500,000 house, they’re putting around 60% down, maybe a little bit more. And at that point in time, I give them an option: They can take out a conventional loan, where they’ve only got to make mortgage payments until they’re 100 years old. Or, option B, they can do an H4P and not have any payment at all. Guess what a lot of them do?”
Foody is seeing more buyers who need only a portion of financing that can be obtained with H4P.
“I’ve got a guy that’s looking at a $1.2 million house,” Foody said. “He’s got a million bucks, and he needs $200,000. He doesn’t want to take the full reverse mortgage where he’s having to put down $400,000-$500,000; he just needs the $200,000 to make up the gap. So, we’re seeing a lot more of that as far as the creativity in the financing.”
Foody has also seen the share of H4P business increase. Last year, the H4P share was estimated at 5% of his total reverse mortgage business, but that figure is about 20% year-to-date in 2023.
“It’s almost quadrupled within the last couple of months because the higher interest rates on the forward mortgages hurts their buying dollar, but it helps our case,” he said.
Interest from real estate professionals
The way that the market has behaved has largely turned it into a buyer’s market, Mangus said.
“A seller at this point is just happy to have a buyer that qualifies,” he said. “What we were fighting there for a couple of years was someone saying they can get a conventional loan in two weeks and close. Most of those issues are now gone because it’s more of a balanced market.”
Appraisals that may have taken weeks are now completed in days, Mangus said. That keeps the closing timeline to between 30-35 days, especially now that refinances have dropped off.
“Our timeframes are not extended the way it was when everybody was refinancing, and so I haven’t had any trouble with them,” Mangus said. “We just funded an H4P yesterday and we closed it in under 30 days, start to finish. Now, we only needed one appraisal and they had their counseling done, which meant we were good to go.”
The need for an additional appraisal or a counseling certificate might extend that process, but for borrowers who have satisfied requirements, it’s easier to hold the pace, Mangus said.
Foody has run into issues with real estate professionals being impatient about reverse mortgage closings taking too long, which he said presents a problem in the Pacific Northwest housing market. These days, Foody is seeing a similar scenario to what Mangus has observed.
“We used to tell [real estate agents] before to conservatively expect 45 to 60 days to close,” Foody said. “But that was when the market was more competitive. Now, we’re closing our transactions on an average of 30 days, which is pretty reasonable for traditional mortgages.”
The tricky part
When Mangus discusses the H4P potential with his peers, he’s found a hard sell for a variety of reasons. One is that many of his peers find it difficult to work with real estate agents.
“That’s a serious deficiency in your business plan,” Mangus said.
Like Mangus, Foody holds CE classes for real estate professionals and hopes that H4P becomes more common and drums up more activity for the reverse mortgage business. But, Mangus admits it can be difficult to convince real estate and reverse mortgage professionals to explore it.
“I’m seeing a lot of people that I’ve done transactions with in the past that had good experiences and are sending back a lot more referral business because they had good experiences,” Foody said. “They were able to help their borrowers, and then I’m getting a lot of new real estate agents that are just hungry and willing to look at creative financing.”
Real estate agents that have been in the business for longer are less willing to consider H4P a viable source of business, Foody said.
“They tend to go with what they know,” he said. “And the idea of new financing tends to be a younger agent’s game, I guess. Those agents who just took a class and get excited, or the long-term referral partners send this business regardless of the market conditions. But then also in these market conditions, it tends to be the newer agents that are hearing about [H4P] for the first time are more open to it.”