A reverse mortgage purchase allows seniors age 62 or older in state to purchase a new house with HECM loan proceeds. The key benefit to the senior is the purchase only requires one set of closing costs vs. buying a house and getting a reverse mortgage after, which would incur two complete sets of closing costs. Created by the Housing and Economic Recovery Act of 2008, this program became live on January 1, 2009. Eligible seniors must adhere to all HECM requirements, all of the standard guidelines apply along with some new regulations and rules.
A few of the fundamentals?
Can purchase existing 1 to 4 unit property
House must serve as principal residence
Once HECM purchase is finished, no additional liens are acceptable (Loan provider in 1st position, HUD in silent 2nd)
Will need to supply financial investment at closing from allowed funding source, see below for specifics
Must occupy house within Sixty days of closing
Newly built properties must have certificate of occupancy
There are some variations between a HECM for purchase and a traditional HECM for seniors in state.
The main distinctions concern the properties types which are eligible, the funds needed at closing, the involvement of a real estate professional in the home loan process, the recommendations of a certified house inspection, and specific settlement costs.
Check out these other pages of information:
Robla, Hagginwood, Gardenland, Del Paso Heights, North Sacramento
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 closing, HECM borrowers will have to supply a financial investment which will be applied to fulfill the difference between the HECM principal limit and the sales price for the house, plus any HECM loan associated fees that are not financed or offset by other allowable FHA funding sources. In other words, the funds from the reverse mortgage and any funds from the sale of the old house (or from the homeowner’s savings) needs to be sufficient to purchase the new house outright.
The difference between principal limit and sales price for the house in state includes any HECM home loan related fees that are not financed or offset by other permitted funding source. Consumers could provide a larger investment amount so that they can maintain a portion of HECM funds for future draws.
What are allowed investment sources?
Homeowner may only use their personal capital or money obtained from selling financial assets.
Withdrawals from homeowner’s personal savings or retirement account will be satisfactory.
Financial institutions are going to be required to validate the original source of all funds prior to closing. A verification of deposit, together with the most up-to-date bank statement, could be used to validate savings and checking accounts. When there is a significant increase in an account, or the account was opened up fairly recently, the financial institution will need to obtain a valid clarification of the source of those funds. This type of documentation needs to be presented in the FHA case binder. Failure to provide the specified documents may lead to a notice of denial and postponement of endorsement.
What funding resources are ineligible?
Gifts
Loan discount points
Interest rate buy downs
Closing cost assistance
Builders incentives
Home owner contributions or property owner financing
Charge card advances
Secured or non-secured loans from another asset (car, home equity)
Consumers may not obtain a bridge loan (often known as “gap financing”) or engage in other temporary financing methods to fulfill the financial investment requirement or payment of settlement costs required to close the purchase transaction. This restriction is comprised of subordinate liens, personal loan, cash withdrawals from charge cards, seller financing and any other lending obligations that cannot be satisfied at closing.
What’s the Purpose of the Real Estate Agent?
Seniors in state should consider a written contract – you need to include contingencies for the sale of the senior’s previous house, the property 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 (This is advised however it is not mandatory)
Evaluates the soundness: structure, construction, and mechanical systems
Determines items which ought to be fixed or replaced before the scheduled closing date
Estimates the remaining useful life of the key systems, equipment, structure, and finishes
Buyers should be at the inspection to ask questions about the condition and maintenance
Required Repairs
Health and safety or architectural integrity issues
Needs to be finished prior to closing by seller
Include in purchase agreement
Buyer can not put any cash into repairs before they own the house
Writing an offer
Must state offer contingent on sufficient inspection performed by qualified inspector
Borrower may wish attorney to review – raises expenses but may be worth it
Client can cancel transaction at any time before closing however, this could affect earnest money deposit
Settlement Costs for a
Standard Home Equity Conversion Mortgage closing costs plus:
Recording fees
Transfer taxes
Varies from state-to-state
Other things you ought to know about HECM in California:
There is no 3 day right of rescission unlike traditional HECM. The 3-day right of rescission period isn’t applicable to HECM for Purchase transactions. Therefore, all initial advances may be disbursed on the day of closing by the escrow officer. However, FHA encourages lenders to get their counsel’s opinion to ensure compliance with Federal or state laws.
Seller incentives aren’t applicable to reverse mortgages.
Existing HECM borrowers who get involved in a HECM for Purchase transaction are ineligible for a decrease in the upfront MIP and loan companies will have to enter in the transaction into FHA Connection as a new HECM.
HUD-approved housing counseling agencies which are authorized to provide reverse mortgage counseling, must counsel those who anticipate making use of the HECM for Purchase option on all topics covered in this Mortgagee Letter and other HUD requirements and issuances.
Financial institutions must be sure the house, when used as collateral for the HECM, satisfies the following property requirements:
1) It is the borrower’s principal residence;
2) Construction is completed and a occupancy certificate or similar has been issued;
3) Any construction home loan financing for the house, 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, during closing, no liens against the house exist.