A reverse mortgage purchase enables seniors age 62 or older in state to buy a new home with HECM loan proceeds. The main benefit to the senior is the fact that purchase only requires one set of settlement costs vs. buying a home and obtaining a reverse mortgage thereafter, which would have two complete sets of settlement costs. Developed by the Housing and Economic Recovery Act of 2008, this program became live on January 1, 2009. Eligible seniors must conform to all HECM requirements, each of the basic rules apply in combination with some new regulations and rules.
What are the basics?
Can purchase existing 1 to 4 unit properties
Property must serve as primary residence
Once HECM purchase is complete, no further liens are acceptable (Loan provider in 1st position, HUD in silent 2nd)
Will have to supply monetary investment at closing from permitted funding source, see below for details
Will have to live in property within 60 days of closing
Newly constructed properties need to have certificate of occupancy
There are some variations between a HECM for purchase and a classic HECM for seniors in state.
The key distinctions concern the properties types that are qualified, the money needed at closing, the involvement of a real estate broker in the mortgage loan process, the recommendation of a qualified professional home inspection, and certain settlement costs.
Check out these other pages of information:
Parkway, Cordova, Parkway-South Sacramento, Fruitridge Manor, Fruitridge Pocket
Permitted Properties
Identical to standard HECM mortgages
Ineligible Properties
Cooperative units
Manufactured housing constructed prior to 1976 and without permanent foundation
Bed and breakfast properties, boarding houses
What’s the money investment requirement?
At closing, HECM borrowers must produce a monetary investment which will be applied to satisfy the difference between the HECM principal limit and the purchase price for the property, plus any HECM loan related expenses that are not financed or offset by other allowed FHA funding sources. This means that, the funds from the reverse mortgage and any money from the sale of the old property (or from the homeowner’s personal savings) must be sufficient to buy the new property outright.
The main difference between principal limit and sales price for the property in state also includes any HECM mortgage loan related costs that are not financed or offset by other permitted funding source. Homeowners can provide a larger down payment amount as a way to keep a percentage of HECM funds for future draws.
What are permitted financing resources?
Borrower can only make use of their own funds or capital obtained from selling financial assets.
Withdrawals from homeowner’s personal savings or pension account will be satisfactory.
Mortgage lenders are going to be required to validate the original source of all the funds in advance of closing. A verification of deposit, in addition to the most current bank statement, could be used to validate savings and checking accounts. When there is a substantial increase in an account, or the account was opened recently, the lender will need to get a legitimate clarification of the source of those funds. This sort of documents must be provided in the FHA case binder. Failure to supply the required documents may result in a notice of denial and delay of endorsement.
Which funding resources are ineligible?
Gifts
Loan discount points
Rate buy downs
Settlement cost assistance
Builder incentives
Home owner contributions or home owner financing
Credit card advances
Secured or non-secured loans from another asset (car, home equity)
Homeowners may not get a bridge loan (often known as “gap financing”) or engage in other interim financing strategies to meet the monetary investment obligation or payment of settlement costs needed to finalize the purchase transaction. This limitation encompasses subordinate liens, unsecured loans, cash withdrawals from charge cards, seller financing as well as any other lending commitments that can not be satisfied at closing.
What’s the Function of the Real Estate Agent?
Seniors in state should consider a written agreement – you need to include contingencies for the sale of the senior’s previous home, the home inspection, etc.
Choosing a Property for Purchase & Obtaining an Inspection
All seniors are strongly encouraged by HUD to have a home inspection from a licensed qualified home inspector (It is suggested however it is not required)
Examines the soundness: structure, construction, and mechanical systems
Describes items that should be fixed or replaced prior to the scheduled closing date
Estimates the remaining practical life span of the major systems, equipment, structure, and finishes
Buyers can be at the inspection to ask questions on the condition and maintenance
Required Repairs
Health and safety or architectural integrity issues
Needs to be completed prior to closing by seller
Include in purchase agreement
Buyer can’t put any cash into repairs before they own the home
Writing an offer
Must state offer conditional on acceptable inspection performed by qualified inspector
Borrower might wish attorney to review – increases costs but can be worth it
Client can cancel transaction anytime before closing however, this may 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 know about jumbo reverse mortgage:
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. Consequently, all initial advances could be paid at the time of closing by the escrow company. However, FHA encourages financial institutions to seek their counsel’s opinion to assure compliance with Federal or state laws.
Seller incentives are not 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 financial institutions must enter in the transaction into FHA Connection as a new HECM.
HUD-approved housing counseling agencies that have been accredited to provide reverse mortgage counseling, must counsel those that anticipate making use of the HECM for Purchase option on all topics covered in this Mortgagee Letter and other HUD requirements and issuances.
Mortgage lenders are required to be sure that the property, when used as collateral for the HECM, satisfies the following property requirements:
1) It is the borrower’s primary residence;
2) Construction is finished and a occupancy certificate or similar was issued;
3) Any construction mortgage 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.