A reverse mortgage purchase enables seniors age 62 or older in state to buy a new property with HECM loan proceeds. The principal benefit to the senior is the fact that transaction only requires one set of closing costs vs. buying a property and getting 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 conform to all HECM standards, each of the basic guidelines apply in combination with some new rules and regulations.

A few of the fundamentals?

Can purchase existing 1 to 4 unit properties
Property will need to serve as primary residence
Once HECM purchase is done, no further liens are permitted (Financial institution in 1st position, HUD in silent 2nd)
Must supply monetary investment at closing from allowable funding source, see below for details
Will have to occupy property within 60 days of closing
Newly built houses require certificate of occupancy

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

The main distinctions concern the properties types which are permitted, the money required at closing, the assistance of a real estate agent in the loan process, the recommendations of a skilled professional property inspection, and specific settlement costs.

Check out these other pages of information:

Arden Town, Perkins, Ramona, Brighton, Polk

Eligible Properties

Same as conventional HECM loans

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

What is the financial investment requirement?

At closing, HECM borrowers need to supply a monetary investment which will be applied to fulfill the difference between the HECM principal limit and the purchase price for the property, as well as any HECM loan connected expenses that aren’t financed or offset by other allowable FHA funding sources. Basically, the funds from the reverse mortgage as well as any funds from the sale of the old property (or from the consumer’s personal savings) needs to be enough to buy the new property outright.

The difference between principal limit and sales price for the property in state includes any HECM loan related fees that aren’t financed or offset by other permitted funding source. Borrowers can provide a larger down payment amount as a way to maintain a portion of HECM funds for future draws.

What are allowable investment options?

Consumer can only use their own money or funds obtained from the sale of assets.
Withdrawals from consumer’s savings or pension account are acceptable.

Mortgage companies will be required to verify the source of all money prior to closing. A verification of deposit, together with the most recent bank statement, may be used to verify savings and checking accounts. When there’s a substantial increase in an account, or the account was opened up fairly recently, the lender will need to obtain a credible clarification of the source of those funds. Such documents needs to be made available in the FHA case binder. Failing to supply the mandatory documents could lead to a notice of denial and postponement of endorsement.

What funding sources are ineligible?

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

Borrowers may not obtain a bridge loan (also referred to as “gap financing”) or engage in other temporary financing techniques to fulfill the monetary investment requirement or payment of settlement costs required to finalize the purchase transaction. This restriction includes subordinate liens, unsecured loans, cash withdrawals from credit cards, seller financing and also 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 agreement – make sure you include contingencies for the sale of the senior’s previous property, the property inspection, etc.

Selecting 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’s recommended but is not mandatory)

Assesses the physical condition: structure, construction, and mechanical systems
Determines items that should be repaired or replaced before the scheduled closing date
Estimates the remaining useful life span of the main systems, equipment, structure, and finishes
Buyers could be at the inspection to ask questions regarding the condition and maintenance

Required Repairs

Health and safety or structural integrity issues
Must be finished prior to closing by seller
Include in purchase agreement
Buyer can not put any cash into repairs before they own the property

Writing an offer

Must state offer conditional on sufficient inspection done by qualified inspector
Borrower might wish attorney to review – raises fees but will be worth it
Client can cancel transaction at any time prior to closing but this could affect earnest money deposit

Settlement Costs for a

Standard Reverse Mortgage settlement costs plus:

Recording fees
Transfer taxes
Varies from state-to-state

Other things you need to understand about reverse mortgage in California:

There’s no 3 day right of rescission contrary to traditional HECM. The 3-day right of rescission period isn’t applicable to HECM for Purchase transactions. Therefore, all initial advances can be disbursed at the time of closing by the escrow company. However, FHA encourages financial institutions 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 participate in a HECM for Purchase transaction are ineligible for a reduction of the upfront MIP and mortgage companies 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 individuals who anticipate utilizing the HECM for Purchase option on all topics covered in this Mortgagee Letter and other HUD requirements and issuances.
Mortgage companies need to ensure the property, when used as collateral for the HECM, satisfies the following property requirements:

1) It’s the borrower’s primary residence;

2) Construction is finished and a C of O or its equivalent was issued;

3) Any construction 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, during closing, no other liens against the property exist.