A reverse mortgage purchase allows seniors age 62 or older in state to buy a new house with HECM loan proceeds. The primary benefit to the senior is that the purchase only requires one set of closing costs vs. buying a house and obtaining a reverse mortgage after, which would 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. Eligible seniors must adhere to all HECM requirements, all of the basic rules apply together with a few new rules and regulations.
What are the basics?
Can buy existing 1 to 4 unit properties
House will need to serve as primary residence
Once HECM purchase is done, no additional liens are permitted (Loan provider in 1st position, HUD in silent 2nd)
Must supply monetary investment at closing from permitted funding source, see below for specifics
Need to live in property within 60 days of close of escrow
Newly constructed homes needs to have certificate of occupancy
There are several differences between a HECM for purchase and a standard HECM for seniors in state.
The main distinctions concern the properties types that are permitted, the cash required at close of escrow, the involvement of a real estate professional in the mortgage process, the recommendations of a qualified professional house inspection, and specific settlement costs.
Check out these other pages of information:
Westwind Estates, Mikon, Bryte, Casa Mobile Home Park, Peethill
Permitted Properties
Same as regular HECM mortgages
Ineligible Properties
Cooperative units
Manufactured housing built prior to 1976 and lacking permanent foundation
Bed and breakfast properties, boarding houses
What is the financial investment requirement?
At close of escrow, HECM borrowers will have to supply a monetary investment which will be applied to satisfy the difference between the HECM principal limit and the purchase price for the property, as well as any HECM loan associated fees that aren’t financed or offset by other allowed FHA funding sources. This means that, the funds from the reverse mortgage as well as any cash from the sale of the old property (or from the consumer’s personal savings) needs to be sufficient to buy the new property outright.
The difference between principal limit and sales price for the property in state includes any HECM mortgage related fees that aren’t financed or offset by other permitted funding source. Borrowers could provide a larger down payment amount as a way to maintain a percentage of HECM funds for future draws.
What are permitted financing resources?
Borrower can only make use of their own funds or cash obtained from selling assets.
Withdrawals from consumer’s personal savings or pension account are usually satisfactory.
Mortgage lenders are going to be required to validate the origin of all resources 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 large increase in an account, or the account was opened up fairly recently, the lending company must get a valid explanation of the source of those funds. This type of paperwork needs to be presented in the FHA case binder. Failure to provide the mandatory paperwork may result in a notice of denial and delay of endorsement.
Which funding resources are ineligible?
Gifts
Loan discount points
Mortgage rate buy downs
Settlement cost assistance
Builder incentives
Seller contributions or homeowner financing
Credit card advances
Secured or non-secured loans from another asset (car, home equity)
Borrowers may not get a bridge loan (also called “gap financing”) or take part in other temporary financing techniques to fulfill the monetary investment requirement or payment of settlement costs necessary to complete the purchase transaction. This restriction includes subordinate liens, personal loans, cash withdrawals from charge cards, seller financing and any other lending commitments that can’t be satisfied at closing.
What is the Purpose of the Real Estate Agent?
Seniors in state should consider a written arrangement – it is best to include contingencies for the sale of the senior’s previous house, the house inspection, etc.
Deciding on a Home for Purchase & Obtaining an Inspection
All seniors are strongly encouraged by HUD to get a home inspection from a licensed certified home inspector (It is suggested however it is not mandatory)
Assesses the soundness: structure, construction, and mechanical systems
Identifies items that ought to be fixed or replaced prior to the scheduled close of escrow date
Estimates the remaining practical life span of the major systems, equipment, structure, and finishes
Buyers should be at the inspection to ask questions regarding the condition and maintenance
Required Repairs
Health and safety or structural integrity issues
Need 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 acceptable inspection performed by qualified home inspector
Borrower might want attorney to review – increases fees but will be worth it
Client may cancel transaction at any time before closing but this could affect earnest money deposit
Closing Costs for a
Standard Reverse Loan settlement costs plus:
Recording fees
Transfer taxes
Varies from state-to-state
Other things you should consider about reverse mortgage loan in California:
There is no three day right of rescission contrary to traditional HECM. The three-day right of rescission period isn’t applicable to HECM for Purchase transactions. Therefore, all initial advances may be disbursed at the time of closing by the settlement agent. However, FHA encourages loan companies to seek their counsel’s opinion to assure compliance with Federal or state laws.
Seller incentives 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 mortgage lenders will have to enter the transaction into FHA Connection as a new HECM.
HUD-approved housing counseling agencies which are accredited to provide reverse mortgage counseling, must counsel people who anticipate using the HECM for Purchase option on all topics covered in this Mortgagee Letter and other HUD requirements and issuances.
Mortgage lenders are required to make sure 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 finished and a occupancy certification or something similar was issued;
3) Any construction mortgage financing for the property, which will function 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 other liens against the property exist.