62+ Homebuyers: The Powerful Secret for Funding Your Dream Home
High mortgage rates, limited inventory and dwindling affordability push many homebuyers to the sidelines. If you're 62 or older and feel your dream home is out of reach, consider a Home Equity Conversion Mortgage for Purchase (H4P) loan. This innovative financing solution can make your dream home a reality, offering a financial lifeline in today’s challenging housing market.
This article covers:
- What Is an H4P Loan and How Does It Work?
- Comparison of Home Funding Options
- Hypothetical Example: Sue’s Dilemma
- Answers to Frequently Asked Questions
What Is an H4P Loan and How Does It Work?
The Home Equity Conversion Mortgage for Purchase (H4P) is a unique loan designed for buyers 62 and over. Launched by the U.S. Government in 2008 and only available through Federal Housing Administration (FHA)-approved lenders like Fairway, it offers an innovative alternative to traditional mortgages. Regulated by the Dept. of Housing and Urban Development (HUD), H4Ps are FHA-insured loans that help older Americans transition into more suitable homes while preserving their savings.
How an H4P Loan Works
Down Payment: Borrowers must make a cash down payment of around 45%-70%* of the purchase price. The exact amount depends on the youngest borrower’s age, current interest rates and the home’s value. Generally, lower interest rates and older age reduce the down payment percentage needed. To get an estimate of the upfront investment you’d need for your desired property, try our online H4P loan calculator.
No Monthly Mortgage Payments: Unlike traditional mortgages, H4P loans don't require monthly principal and interest mortgage payments. Repayment of the loan balance can be deferred as long as you live in the home, maintain it as your primary residence and cover essential property charges like taxes and insurance.
Interest and Fees: Interest and fees accumulate over time, but you can make voluntary payments to reduce the loan balance.
Loan Repayment: The loan becomes due when the property is no longer the principal residence of at least one borrower. Usually, it’s settled by selling the home. Heirs have three options: sell the home, walk away from the home by signing a deed-in-lieu of foreclosure or keep the home by repaying the loan balance or 95% of its appraised value—whichever is less. Rest assured, the FHA guarantees that neither you nor your heirs will ever owe more than the home’s value when it’s time to repay the loan.**
Comparing Home Funding Options for Buyers 62+
When considering how to fund the purchase of a new home, buyers 62 and over have three primary options: paying in all cash, taking out a traditional mortgage or using an H4P loan. Let’s explore the advantages and disadvantages of each:
All Cash
Pros:
- Own the home free and clear
- No monthly principal and interest mortgage payment
- No interest on the purchase
Cons:
- Cash tied up in an illiquid asset
- No protection against falling home values
- Opportunity cost of using home sale proceeds
- Significant portion of retirement savings trapped in real estate
Traditional Mortgage
Pros:
- Less required upfront cash outlay
- Various options: Conventional, VA, FHA
- Loan balance decreases over time
Cons:
- Required monthly payments (potentially greatest cash outlay over time)
- Reduced cash flow over time in retirement
- Risk of negative equity if home values fall
- Must meet all loan obligations
- Lien stays on the home until the mortgage is fully repaid
H4P Loan
Pros:
- Increased purchasing power
- No monthly mortgage payments (must pay essential property charges, like taxes and insurance)
- Generally easier loan to qualify for compared to a traditional mortgage
- Less cash outlay over time
- Helps preserve retirement assets***
- Protection against falling home values**
Cons:
- Unpaid balance accrues interest and MIP, reducing home equity
- Requires a more significant upfront monetary investment compared to traditional mortgages
- Must meet all loan obligations
- Lien stays on the home until the mortgage is fully repaid
Hypothetical Example: Sue’s Dilemma****
Meet Sue:
Sue is a 73-year-old retiree looking to relocate closer to family. She can net $500,000 from selling her current home and has $200,000 in retirement savings. Sue finds her dream single-story home for $600,000.
All Cash Option
Sue could use her $500,000 home sale proceeds and dip into her retirement savings for the remaining $100,000 to buy the home outright. This would leave her with no mortgage but only $100,000 in liquid savings, limiting her financial flexibility and potentially jeopardizing her retirement funds.
Traditional Mortgage Optional
Alternatively, Sue could use a quarter of her home sale proceeds for a down payment and take out a conventional 30-year fixed-rate mortgage for the remaining $480,000. At a 7.0% interest rate, her monthly principal and interest mortgage payment would be $3,193.
Using a traditional mortgage preserves more of her retirement savings upfront but saddles her with a significant monthly payment during retirement, making unexpected expenses harder to handle. Over 30 years, she could end up paying as much as $1,149,643 in principal and interest payment—plus her initial cash investment.
H4P Loan Option
With an H4P, Sue could use $380,000 from her home sale proceeds for the down payment on the new home, leaving her with $320,000 in savings. Financing $243,000 at an expected rate of 6.525% for an adjustable-rate H4P,* she would have no monthly principal and interest payments, only needing to cover property-related charges. This allows her to defer loan repayment as long as she lives in the home and meets loan requirements, preserving her cash flow and retirement savings.***
Ultimately, you should choose the option that best aligns with your financial goals and retirement lifestyle.
Frequently Asked Questions
What property types are eligible?
Eligible properties for an H4P loan include single-family homes, 2- to 4-unit properties, approved condos and more.
Do I own my home with an H4P loan?
Yes, you retain ownership. The H4P loan is secured with a lien, similar to a traditional mortgage.
What are the allowable funding sources when purchasing a home with an H4P loan?
Funds must come from liquid assets (e.g., a savings account) or the documented sale of other assets.
Can I buy a flipped home with an H4P loan?
The sales contract must be signed more than 90 days after the seller purchases the property.
Are seller concessions allowed?
Yes, the seller can contribute up to 6% of the sales price toward closing costs.
Is there a Mortgage Insurance Premium (MIP)?
Yes. Like an FHA mortgage, you’ll pay upfront and ongoing mortgage insurance premiums, usually financed into the loan. Explore the benefits MIP offers reverse mortgage borrowers.
Can I start the application before my new construction home is completed?
Yes, but the appraisal and loan closing can only occur after the Certificate of Occupancy is issued.
Let's Start a Conversation!
Whether you're looking to downsize, relocate closer to family or find a more suitable home for your retirement years, the H4P loan stands out as a smart, strategic choice. Don’t let a challenging housing market keep you on the sidelines. Explore Fairway's various home loan options and make your dream home a reality.
*The required down payment on your new home is determined on a number of factors, including your 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.
**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.
***This advertisement does not constitute financial advice. Please consult a financial advisor regarding your specific situation.
****Story is for illustration purposes only. The persons depicted herein are fictional and any resemblance to actual persons is a coincidence.