How to downsize with a reverse mortgage

Couple use funds from one house to buy a smaller place using FHA program

John and Susanne Ferry, both 62, have tried to sell their Mount Shasta home for three years.

Susanne Ferry has rheumatoid arthritis, so the Ferrys want to move to a warmer climate.

The plan was to use the money they made from selling their house, which they own outright, to buy another home.

But the depressed housing market hasn't cooperated.

They initially asked $700,000 for the two-story, 2,400-square-foot house with views of the Shasta Valley. But they've had to reduce the list price to $498,000.

Now, thanks to a new feature in the Federal Housing Administration's reverse mortgage program, the Ferrys have bought their retirement dream home. They closed last week on a house in Tuscany Villas, a 55-and-older community in north Redding.

And they still haven't sold their house in Mount Shasta.

The Ferrys are among the first people in the north state to take advantage of FHA's reverse mortgage purchase option.

Reverse mortgages, which enable seniors to withdraw some of the equity in their home, have been around for years. The purchase option of the federal program started in January.

Using a reverse mortgage purchase, the Ferrys made a $150,000 down payment - money they took out of savings and some investments - and the reverse mortgage paid the $200,000 balance on the $350,000 home.

The Ferrys don't have a mortgage payment. All they pay for is taxes and insurance.

When the home is sold or when the Ferrys die, the $200,000 borrowed must be paid in full plus the interest that has accrued.

How much the buyer can borrow in a reverse mortgage purchase depends on the age of the borrower, current interest rates, and the lesser of the appraised value or the reverse mortgage FHA limit, which is $625,000.

Like a traditional reverse mortgage, the buyer must be at least 62 years old.

"It's just wonderful. We wanted this house so much," Susanne Ferry said of their home in Tuscany Villas.

The Ferrys worked with Chris Lamm of Security 1 Lending in Redding. Security 1 is among several north state lenders that do reverse mortgages.

"Some seniors see the advantage in this program in being able to downsize into a smaller, less maintenance home and one that is more energy efficient," Lamm said. "That is certainly the case with the Ferrys.

"... For a senior who wants to relocate, who wants to be closer to their family, this is a great solution."

One thing to be aware of with a reverse mortgage is that closing costs can be steep compared to a other mortgages. Costs can range between $10,000 and $20,000, Lamm said, adding that they're typically financed into the loan amount.

Joe Rodola, a Housing and Urban Development reverse-mortgage counselor based in Redding, said the older you are, the more money you can take out with a reverse mortgage.

Rodola doesn't know whether there will be a market in Shasta County for the reverse mortgage purchase program.

The median sales price of a home in Shasta County is under $200,000.

"It's really an unknown market," Rodola said. "I couldn't tell you how many seniors are sitting out there with $60,000 or $80,000 that would like to buy and still can't afford to. . . . A lot of it at this point is that nobody really knows it's out there."

That was the case with John and Susanne Ferry. They'd looked at homes in Tuscany Villas a number of times before their real estate agent Richard Martin told them about the reverse mortgage purchase program.

"We could have done it (without the reverse mortgage), but we wouldn't want to put ourselves, with our age, in that position," Susanne Ferry said.

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