Reverse mortgages are an overlooked product that can help builders sell new homes to seniors, particularly trade-up buyers.

Some builders already are using the product as part of their sales strategy, especially those that develop residential communities aimed at older consumers.

Florida’s demographics - an aging population projected to grow older - demonstrates potential for the use of reverse mortgages in home sales.

In simplified terms, a reverse mortgage is a type of first mortgage that enables seniors to convert the equity in their home into cash. The loan is called a reverse mortgage because the loan funds are paid by the lender to the borrower. This is the opposite of a traditional home purchase mortgage, where the borrower makes payments to the lender. To qualify for a reverse mortgage, a consumer must (1) own their home, (2) be at least 62 years old, and (3) have little or no debt on their existing home.

Borrowers can choose to draw down the funds from a reverse mortgage as a (1) lump sum payment, (2) line of credit, (3) monthly check for life, (4) monthly check for a shorter, pre-determined period, or (5) a combination of a line of credit and monthly check. The maximum size of a reverse mortgage is determined primarily by the borrower’s age at the time of application and the value of the home. The older the applicant and more expensive the home, the larger the possible loan.

The borrower makes no mortgage payments to the lender while the reverse mortgage is outstanding. The loan becomes repayable in full only when the borrower passes away, sells the home, or moves out permanently. The borrower keeps title to the home while the loan is outstanding. And when the loan becomes due, the borrower’s survivors or heirs can still keep the home if they pay off the loan. The loan repayment amount can never exceed the value of the home - a no-risk situation for seniors.

Seniors can use the money from a reverse mortgage however they wish. The most common uses are to supplement retirement income and finance home improvements. Many seniors, though, are also using reverse mortgages as a financial planning tool, and there has been growing interest in using reverse mortgages for estate planning and to pay for in-home health care, non-covered prescription drugs, long-term care insurance, and similar purposes.

While most reverse mortgages are made to seniors to enable them to stay in their present home and give them additional income, borrowers can also use a reverse mortgage to help finance the purchase of a new home in a way that can be more beneficial than a traditional forward mortgage.

The way it works is this: The senior sells their existing house and takes out a reverse mortgage in connection with the purchase of a new house. All or a part of the reverse mortgage proceeds are applied toward the purchase of the new home, along with a portion of the proceeds from the sale of the old home. This approach allows the senior to buy the new home without taking on a new mortgage repayment burden and to keep some or most of the sales proceeds from the old home.

The two types of reverse mortgage products available in Florida that have been used for this purpose are the federally-insured Home Equity Conversion Mortgage (HECM), and Fannie Mae’s Home Keeper mortgage (under its Home Keeper for Home Purchase program). HECM loans are insured by the Federal Housing Administration (FHA), a part of the U.S. Department of Housing and Urban Development.

In addition to facilitating new home sales to seniors that might not occur otherwise, reverse mortgages can also be structured in a way to set aside funds to assure the future repayment by new home buyers of regular monthly homeowners’ association dues or similar fees.

In Florida, the potential for reverse mortgages is enormous. According to the U.S. Census Bureau, Florida now has the highest proportion of total residents aged 65 or older of any state, and is projected to keep this No. 1 rank through the year 2025. Seniors accounted for just under 19 percent of all Florida residents as of July 1, 1998, or 2.7 million people. By July 1, 2025, this share is projected to reach 26 percent.

Seniors nationwide are sitting on vast amounts of home equity waiting to be tapped - for home purchases and other purposes. According to one estimate, 14 million seniors currently have $1.8 trillion in equity in their homes.

To succeed in using reverse mortgages to help sell homes, however, builders should partner with lenders that offer reverse mortgages and that are educated about them. This is because reverse mortgages are a complex product that requires specialized knowledge, good working relationships with "counselors" (which provide the mandatory financial consultation to all prospective borrowers), and the special skills needed to successfully market to and service senior consumers.