A reverse mortgage purchase enables seniors age 62 or older in state to purchase a new property with HECM loan proceeds. The key benefit to the senior is the fact that purchase only requires one set of settlement costs vs. buying a property and getting a reverse mortgage afterwards, which would incur two complete sets of settlement costs. Created by the Housing and Economic Recovery Act of 2008, this program became live on January 1, 2009. Qualified seniors must abide by all HECM standards, all of the standard regulations apply in combination with some new regulations and rules.
What are the fundamentals?
Can buy existing 1 to 4 unit property
House will need to serve as principal residence
Once HECM purchase is completed, no additional liens are permitted (Financial institution in 1st position, HUD in silent 2nd)
Will have to provide monetary investment at closing from allowable funding source, see below for specifics
Will have to reside in property within 60 days of closing
Newly constructed properties will need to have certificate of occupancy
There are several differences between a HECM for purchase and a classic HECM for seniors in state.
The major differences concern the properties types which are allowed, the cash required at closing, the involvement of a real estate broker in the home loan process, the recommendation of a certified property inspection, and certain closing costs.
Check out these other pages of information:
Bryte, Mikon, Capri Mobile Home Park, Trails End Mobile Home Park, Bryte Mobile Home Park
Eligible Properties
Same as conventional 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 money investment requirement?
At closing, HECM borrowers will need to produce a monetary investment which is applied to satisfy the difference between the HECM principal limit and the sales price for the property, as well as any HECM loan connected expenses that are not financed or offset by other allowable FHA funding sources. Basically, the funds from the reverse mortgage as well as any money from the sale of the old property (or from the consumer’s personal savings) will have to be sufficient to purchase the new property outright.
The difference between principal limit and sales price for the property in state also includes any HECM home loan related fees that are not financed or offset by other allowable funding source. Borrowers can provide a larger down payment amount in order to retain a portion of HECM funds for future draws.
What are allowable financing resources?
Consumer may only use their personal capital or money obtained from the sale of assets.
Withdrawals from consumer’s savings or pension account are usually satisfactory.
Loan providers are going to be required to validate the original source of all the money in advance of closing. A verification of deposit, along with the latest bank statement, may be used to validate savings and checking accounts. When there is a substantial increase in an account, or the account was opened up fairly recently, the financial institution must obtain a credible explanation of the source of those funds. Such documentation will have to be provided in the FHA case binder. Failure to supply the specified paperwork could lead to a notice of denial and postponement of endorsement.
What funding resources are ineligible?
Gifts
Loan discount points
Mortgage rate buy downs
Settlement cost assistance
Home builder incentives
Seller contributions or seller financing
Charge card advances
Secured or non-secured loans from another asset (car, home equity)
Borrowers may not obtain a bridge loan (generally known as “gap financing”) or engage in other interim financing methods to satisfy the monetary investment requirement or payment of closing costs needed to close the purchase transaction. This limitation is comprised of subordinate liens, personal loans, cash withdrawals from charge cards, seller financing and any other lending obligations that can’t be satisfied at closing.
What is the Role of the Real Estate Agent?
Seniors in state must consider a written contract – you need to include contingencies for the sale of the senior’s previous property, the home inspection, etc.
Deciding on a House for Purchase & Obtaining an Inspection
All seniors are strongly encouraged by HUD to have a home inspection from a licensed qualified professional home inspector (It is recommended however it is not mandatory)
Examines the soundness: structure, construction, and mechanical systems
Specifies items that need to be repaired or replaced prior to the scheduled closing date
Estimates the remaining useful life span of the main systems, equipment, structure, and finishes
Buyers should be at the inspection to ask questions on the condition and maintenance
Required Repairs
Health and safety or structural integrity issues
Needs to be finished prior to closing by seller
Include in purchase agreement
Buyer can’t put any cash into repairs before they own the property
Writing an offer
Must state offer contingent on satisfactory inspection conducted by qualified home inspector
Borrower might wish attorney to review – raises fees but will be worth it
Client can cancel transaction anytime before closing but this could affect earnest money deposit
Settlement Fees for a
Standard Reverse Home Loan costs plus:
Recording fees
Transfer taxes
Varies from state-to-state
Other things you need to know about reverse mortgage experts in California:
There is no three day right of rescission unlike traditional HECM. The three-day right of rescission period isn’t applicable to HECM for Purchase transactions. Therefore, all initial advances may be paid at the time of closing by the escrow officer. However, FHA encourages lenders to get their counsel’s opinion to assure compliance with Federal or state laws.
Seller incentives aren’t applicable to reverse mortgages.
Existing HECM borrowers who participate in a HECM for Purchase transaction are ineligible for a reduction of the upfront MIP and lenders will need to enter in the transaction into FHA Connection as a new HECM.
HUD-approved housing counseling agencies which are accredited to provide reverse mortgage counseling, must counsel those who anticipate using the HECM for Purchase option on all topics covered in this Mortgagee Letter and other HUD requirements and issuances.
Loan providers must be sure that the property, when used as collateral for the HECM, meets the following property requirements:
1) It’s the borrower’s principal residence;
2) Construction is complete and a C of O or something similar has been issued;
3) Any construction home loan 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, at the time of closing, no other liens against the property exist.