A reverse mortgage purchase allows seniors age 62 or older in state to purchase 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 afterwards, which will incur two complete sets of closing costs. Developed by the Housing and Economic Recovery Act of 2008, this program became live on January 1, 2009. Qualified seniors must conform to all HECM standards, all of the basic regulations apply along with some new rules and regulations.
What are the basics?
Can buy existing 1 to 4 unit property
Property will need to serve as principal residence
Once HECM purchase is completed, no additional liens are allowed (Lender in 1st position, HUD in silent 2nd)
Must supply financial investment at closing from permitted funding source, see below for details
Will have to occupy house within 60 days of close of escrow
Newly built properties must have certificate of occupancy
There are several differences between a HECM for purchase and a standard HECM for seniors in state.
The major distinctions concern the properties types that are eligible, the money needed at close of escrow, the involvement of a real estate broker in the mortgage process, the recommendation of a professional property inspection, and specific settlement fees.
Check out these other pages of information:
Swanston, North Sacramento, Gardenland, Sacramento, Oak Park
Eligible Properties
Identical to 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 monetary investment requirement?
At close of escrow, HECM borrowers need to supply a financial investment which is to be applied to satisfy the difference between the HECM principal limit and the sales price for the house, plus any HECM loan connected expenses which are not financed or offset by other allowed FHA funding sources. Basically, the funds from the reverse mortgage as well as any money from the sale of the old house (or from the consumer’s savings) needs to be enough to buy the new house outright.
The primary difference between principal limit and sales price for the house in state also includes any HECM mortgage related fees which are not financed or offset by other allowable funding source. Consumers may provide a larger down payment amount in order to maintain a portion of HECM funds for future draws.
What are permitted investment sources?
Consumer can only use their own money or cash obtained from selling assets.
Withdrawals from consumer’s savings or pension account are usually acceptable.
Financial institutions are going to be required to confirm the original source of all funds in advance of close of escrow. A verification of deposit, in addition to the latest bank statement, may be used to confirm savings and checking accounts. If there is a considerable increase in an account, or the account was opened up fairly recently, the lender will have to get a valid justification of the source of those funds. Such documents needs to be presented in the FHA case binder. Failure to supply the specified paperwork could lead to a notice of denial and postponement of endorsement.
Which funding resources are ineligible?
Gifts
Loan discount points
Mortgage rate buy downs
Settlement cost assistance
Home builder incentives
Seller contributions or seller financing
Credit card advances
Secured or non-secured loans from another asset (car, home equity)
Consumers will not get a bridge loan (also called “gap financing”) or take part in other temporary financing strategies to meet the financial investment obligation or payment of settlement fees necessary to complete the purchase transaction. This limitation includes subordinate liens, personal loans, cash withdrawals from charge cards, seller financing along with other lending obligations that can not be satisfied at closing.
What is the Purpose of the Real Estate Broker?
Seniors in state should consider a written agreement – you need to include contingencies for the sale of the senior’s previous property, the property inspection, etc.
Deciding on a House for Purchase & Obtaining an Inspection
All seniors are strongly encouraged by HUD to get a home inspection from a licensed qualified home inspector (It is recommended however it is not required)
Examines the soundness: structure, construction, and mechanical systems
Determines items that ought to be fixed or replaced prior to the scheduled close of escrow date
Estimates the remaining useful life of the major systems, equipment, structure, and finishes
Buyers can be at the inspection to ask questions about the condition and maintenance
Required Repairs
Health and safety or structural integrity issues
Have to be completed prior to closing by seller
Include in purchase agreement
Buyer can not put any money into repairs before they own the property
Writing an offer
Must state offer conditional on satisfactory inspection conducted by qualified inspector
Borrower may want attorney to review – will increase costs but will be worth it
Client may cancel transaction any time prior to closing but this could affect earnest money deposit
Closing Costs for a
Standard Reverse Home Loan settlement costs plus:
Recording fees
Transfer taxes
Varies from state-to-state
Other things you should know about reverse mortgage loans:
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 lenders to seek 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 reduction of the upfront MIP and loan companies need to enter in the transaction into FHA Connection as a new HECM.
HUD-approved housing counseling agencies which have been accredited to provide reverse mortgage counseling, must counsel people 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 will have to ensure that the house, when utilized as collateral for the HECM, satisfies the following property requirements:
1) It’s the borrower’s principal residence;
2) Construction is complete and a CO or its equivalent has been issued;
3) Any construction mortgage financing for the house, 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 house exist.