It is possible to use a reverse mortgage to buy a home – but there are a few important elements to consider.
Unfortunately, you cannot get a pre-approval and I’ll explain why in this article.
I’ll also walk you through the process and how it would work in practice using a real life example to show you the process of buying a home with a reverse mortgage.
Free Guide – The Inside Secrets To A Reverse Mortgage
Before I get started, if you’re new to reverse mortgages in Canada – make sure and check out my free guide which outlines the inside secrets and hidden costs you need to about – get your copy at:
Using A Reverse Mortgage To Purchase A Home
You can read the written version below, or watch the video version of this article here:
The Basic Numbers
So, it’s first worth noting that you can only qualify for 10% to 55% on a reverse mortgage. For a more precise estimate of where you fit in this range, see this article on qualifying for a reverse mortgage – how much can I get?
This means that you’ll need to get the remaining 90% to 45% as a down payment.
For example, if you qualify for 35% of a home’s value as a reverse mortgage you’ll need 65% as a down payment.
Getting an additional mortgage for the remaining money on top of this is going to be very hard. In fact, it will be almost impossible – so if you aren’t able to get the full down payment then using a reverse mortgage to purchase a home may not work for you.
Regular Mortgage – Qualification
When it comes to qualifying for a regular or traditional mortgage, lenders will look at 3 key components to decide how much mortgage you qualify for:
As you can see from the diagram, the lender uses your income, credit score and expenses to produce a dollar amount for the mortgage you are able to get.
They can then give you a formal letter with this amount – and this formal lending offer is called a mortgage pre-approval.
Reverse Mortgage – Qualification
When it comes to a reverse mortgage, qualification is completely different.
The following diagram shows how lenders decide how much you qualify for:
As you can see in the image, with a reverse mortgage a lender will look at your age, property and location to give you a percentage amount of how much you can get for a reverse mortgage.
This is completely different to a regular or traditional mortgage – and it’s important as it explains a key issue: you cannot get a pre-approval for a reverse mortgage.
Why You Can’t Get A Pre-Approval For A Reverse Mortgage
As you can see above, with a regular mortgage you’ll be given a dollar amount that you can then use to inform your purchase. This is how you get a pre-approval.
But this isn’t possible with a reverse mortgage – since it’s based on a percentage of the home, rather than a dollar amount.
That’s because a reverse mortgage is not based upon any dollar based inputs (like income and expenses) – the property itself is one of the most important components of a reverse mortgage and – since you don’t know the property yet (location, type or address) – this is why you can’t get a pre-approval for a reverse mortgage.
How Much Can You Afford Then?
As noted, the amount you’ll qualify for with a reverse mortgage is based on the property type, location and your age.
Since you don’t know the property or location until you actually purchase the home, you’ll have to use estimates.
What you can do is pick some properties in the area you’re looking at and get an estimated range of the reverse mortgage you can get based on those.
An Example Using Estimates
(This is a made up example to show you what this would look like in practice – none of the numbers are real)
John is looking to buy a detached home in either Kitchener, Waterloo, Cambridge or Guelph.
He is aged 65, so knows that the range for this age is 17% to 41% (again see my article on how much reverse mortgage can I get for where this range came from)
John asks a reverse mortgage expert to pull some estimates for him and sends him 4 example properties – one in each of the towns he is thinking about buying.
For each of the properties John qualifies for the following amounts:
Kitchener – 35%
Waterloo – 31%
Cambridge – 37%
Guelph – 38%
John now knows the range he can get a reverse mortgage for the homes he’s looking at is in the 31% to 38% range.
Of course, this is just an estimate – he can (and should) also get a quote on an exact home before he puts in an offer.
What’s The Process For Buying A Home?
The process is actually very similar to buying a home with a regular mortgage.
You start by putting an offer in on a home. It’d be smart to include a financing clause – your Real Estate Agent should be able to help with this.
Make sure and send the property to a reverse mortgage expert who can find you the best quote and tell you what percentage reverse mortgage you can get.
After this, you make a full application for a reverse mortgage and – once you’re approved – the purchase then goes through the normal mortgage purchase process – the reverse mortgage lender will pay the funds to the seller’s lawyer on closing.
In reality, everything is largely the same as buying a home with any other mortgage lender in Canada.
In Summary – Using A Reverse Mortgage To Buy A Home
Using a reverse mortgage to purchase a home is becoming more common in Canada.
While you cannot get a pre-approval – because reverse mortgages are based on a percentage of the home rather than dollar amounts – you can get estimates instead.
Make sure and include a financing clause in your home offer and contact a reverse mortgage expert to get a more exact quote once you’ve found a property you wish to make an offer on.
Get A Free Reverse Mortgage Assessment In 90 Seconds
If you’re interested in a reverse mortgage – whether to buy a home or otherwise – I’ll give you a free, professional assessment and advise you if this is a good solution for you, or if something better works.
All it takes is 90 seconds – completely free, no obligation and no hard sales pitch – simply click the link below:
A Canadian Chartered Accountant and licensed Mortgage Professional – creator of Reverse Mortgage Pros – the #1 reverse mortgage specialists in Canada. I make it my mission to educate Canadians about how reverse mortgages work so that you can make an informed and educated decision that’s right for you and your family.