A reverse mortgage purchase allows seniors age 62 or older in state to buy a new home with HECM loan proceeds. The main benefit to the senior is the purchase only involves one set of closing costs vs. buying a home and obtaining a reverse mortgage after, which will have two complete sets of closing costs. Created by the Housing and Economic Recovery Act of 2008, this program became live on January 1, 2009. Qualified seniors must adhere to all HECM standards, all the standard rules apply in addition to some new regulations.

A few of the fundamentals?

Can purchase existing 1 to 4 unit property
Property must serve as primary residence
Once HECM purchase is done, no additional liens are permitted (Loan provider in 1st position, HUD in silent 2nd)
Will need to supply monetary investment at closing from permitted funding source, see below for specifics
Will have to occupy property within Sixty days of close of escrow
Newly built houses need to have certificate of occupancy

There are a few variations between a HECM for purchase and a traditional HECM for seniors in state.

The key distinctions concern the properties types that are allowed, the money required at close of escrow, the involvement of a realtor in the home loan process, the recommendations of a certified home inspection, and certain settlement fees.

Check out these other pages of information:

Parkway, Cordova, Fruitridge Manor, Fruitridge Pocket, Pollock

Permitted Properties

Same as regular HECM mortgages

Ineligible Properties
Cooperative units
Manufactured homes constructed before 1976 and without permanent foundation
Bed and breakfast properties, boarding houses

What’s the financial investment requirement?

At close of escrow, HECM borrowers must supply a monetary investment which is applied to satisfy the difference between the HECM principal limit and the sales price for the property, plus any HECM loan related fees that aren’t financed or offset by other allowed FHA funding sources. In other words, the funds from the reverse mortgage as well as any funds from the sale of the old property (or from the borrower’s personal savings) has to be adequate to buy the new property outright.

A real difference between principal limit and sales price for the property in state includes any HECM home loan related costs that aren’t financed or offset by other permitted funding source. Homeowners can provide a larger investment amount so that they can keep a portion of HECM funds for future draws.

What are permitted funding sources?

Homeowner may make use of their own money or cash obtained from selling properties and assets.
Withdrawals from borrower’s savings or pension account are generally satisfactory.

Loan companies are going to be required to validate the original source of all the money prior to close of escrow. A verification of deposit, in addition to the most current bank statement, could be used to validate savings and checking accounts. Whether there is a significant increase in an account, or the account was opened up recently, the mortgage lender must obtain a legitimate justification of the source of those funds. Such paperwork has to be provided in the FHA case binder. Failing to provide the required documents could lead to a notice of denial and delay of endorsement.

Which funding sources are ineligible?

Gifts
Loan discount points
Mortgage rate buy downs
Closing cost assistance
Building contractors incentives
Seller contributions or homeowner financing
Credit card advances
Secured or non-secured loans from another asset (car, home equity)

Homeowners may not obtain a bridge loan (also referred to as “gap financing”) or participate in other temporary financing techniques to fulfill the monetary investment obligation or payment of settlement fees required to finalize the purchase transaction. This limitation encompasses subordinate liens, personal loans, cash withdrawals from credit cards, seller financing as well as any other lending commitments that can’t be satisfied at closing.

What’s the Role of the Realtor?

Seniors in state should consider a written agreement – you need to include contingencies for the sale of the senior’s previous home, the house inspection, etc.

Selecting a Property for Purchase & Obtaining an Inspection

All seniors are strongly encouraged by HUD to have a home inspection from a licensed professional home inspector (It’s recommended but is not required)

Evaluates the physical condition: structure, construction, and mechanical systems
Identifies items that ought to be fixed or replaced before the scheduled close of escrow date
Estimates the remaining practical life span of the major systems, equipment, structure, and finishes
Buyers can be at the inspection to ask questions regarding the condition and maintenance

Required Repairs

Health and safety or structural integrity issues
Needs to be completed prior to closing by seller
Include in purchase agreement
Buyer can’t put any cash into repairs before they own the home

Writing an offer

Must state offer conditional on acceptable inspection performed by qualified inspector
Borrower might want attorney to review – increases fees but may be worth it
Client may cancel transaction anytime before closing however this may affect earnest money deposit

Settlement Fees for a

Standard Reverse Loan fees plus:

Recording fees
Transfer taxes
Varies from state-to-state

Other things you should know about reverse mortgages:

There’s no three day right of rescission unlike traditional HECM. The three-day right of rescission period isn’t applicable to HECM for Purchase transactions. As a result, all initial advances may be paid at the time of closing by the settlement agent. However, FHA encourages financial institutions to get their counsel’s opinion to assure compliance with Federal or state laws.
Seller concessions aren’t applicable to reverse mortgages.
Existing HECM borrowers who take part in a HECM for Purchase transaction are ineligible for a decrease in the upfront MIP and financial institutions must enter in the transaction into FHA Connection as a new HECM.
HUD-approved housing counseling agencies that have been approved to provide reverse mortgage counseling, must counsel individuals who anticipate using the HECM for Purchase option on all topics covered in this Mortgagee Letter and other HUD requirements and issuances.
Loan companies will have to be sure that the property, when utilized as collateral for the HECM, meets the following property requirements:

1) It is the borrower’s primary residence;

2) Construction is complete and a occupancy certificate or its equivalent has been issued;

3) Any construction home loan financing for the property, which will serve as the collateral for the HECM loan, is satisfied and the HECM liens will be in a first and second lien position and, at the time of closing, no liens against the property exist.