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Mortgage to Build a new House

Simple House Building / October 4, 2022

Ken Tighe has sent the following question in the ask experts series. My wife will be 65 on April 5, 2017 and I was 65 on 2/4/2015. We currently own our home but want to build a new home on a lot we own that will better accommodate us in our advanced age. We have the cash to build the new home but can a reverse mortgage be used to pay off the construction loan once the home is completed?

Hi Ken,

I would love to give you a simple and quick answer but the truth is “maybe”. There are so many caveats that surround this type of transaction that could make the property ineligible at the time you go to retire the construction financing that I can’t tell you for sure that the construction loan can be retired by the reverse mortgage.

For example, HUD just implemented a new rule that you cannot use reverse mortgage proceeds to pay off a loan that was taken less than 12 months ago. That would mean that the last draw of the construction loan had to be taken at least 12 months prior to the reverse mortgage application. You also have a lot of issues you have to concern yourself with depending on whether or not you are the builder and required warranties, etc. for new construction that you can’t give to yourself. Depending on the location of the property, there are sometimes issues with the permits and final Certificates of Occupancy with relation to the HUD requirements of same.

Then there is always the property itself. If you build in an area where similar homes and sales of such are abundant, getting an appraisal is usually not an issue but if you build in a rural area or if your property is unique and recent similar sales cannot be found, it may be a great home but may not be eligible for HUD insurance and therefore ineligible for the HECM reverse mortgage loan.

To make a long story short, there is a possibility that if you need to pay off that construction loan within the first 12 months of construction and need take out financing for that specific function, the reverse mortgage may not achieve that goal. If all the circumstances come together to meet HUD requirements, it might be fine but I don’t think I would recommend proceeding if that was the only way the deal would work and you would risk financial peril if the reverse mortgage was not available to take out the construction loan immediately preceding completion.

If you can build the home and the reverse mortgage is your preference but not a requirement, and knowing that you may have to wait a year to apply after completion or that you may never be able to qualify for a reverse mortgage on the property and want to construct the home anyway, then at least you can plan accordingly.

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