Can You Use a Reverse Mortgage to Buy a Second Home?

Many affluent seniors dream of buying a small cabin in the woods or a condo near the beach to enjoy during retirement. They often ask: Can I use a reverse mortgage to buy a second home?

The answer is yes, but the mechanics of the transaction must be structured very carefully to avoid violating FHA federal laws.

The Golden Rule: Primary Residence Only

First, we must clarify the collateral. You cannot put a reverse mortgage on a vacation home or an investment property. The FHA explicitly prohibits this.

The reverse mortgage must be placed on your Primary Residence—the home where you file your taxes and live for the majority of the calendar year.

The Strategy: Cash Out for Purchase

If you have a massive amount of equity in your primary residence, you can use a reverse mortgage to extract a lump sum of tax-free cash.

Once that cash is deposited into your checking account, the FHA does not care how you spend it. - You can use $150,000 of your reverse mortgage proceeds to buy a small lake cabin in cash. - You now own the lake cabin free and clear. - Your primary residence has the reverse mortgage lien on it.

The Occupancy Trap

This strategy works perfectly, provided you are very careful about your calendar.

Remember, the home securing the reverse mortgage must remain your primary residence. If you buy the lake cabin and end up loving it so much that you stay there for 8 months out of the year, you have violated your FHA mortgage contract.

By spending the majority of the year at the cabin, your primary residence has legally become a secondary home. The reverse mortgage servicer will declare your loan Due and Payable, forcing you to sell the primary home to pay off the massive loan balance.

If you use this strategy, you must strictly limit your time at the second home to less than 6 months a year.