A reverse mortgage purchase makes it possible for seniors age 62 or older in state to buy a new home with HECM loan proceeds. The principal benefit to the senior is that the purchase only involves one set of settlement costs vs. purchasing a home and obtaining a reverse mortgage afterwards, which would incur two complete sets of settlement costs. Developed by the Housing and Economic Recovery Act of 2008, the program became live on January 1, 2009. Eligible seniors must comply with all HECM standards, each of the basic rules apply in addition to some new regulations and rules.

What are the fundamentals?

Can buy existing 1 to 4 unit properties
Property must serve as principal residence
Once HECM purchase is finished, no additional liens are allowed (Loan provider in 1st position, HUD in silent 2nd)
Will need to provide financial investment at closing from allowed funding source, see below for specifics
Will need to live in home within 60 days of closing
Newly constructed properties will need to have certificate of occupancy

There are some variations between a HECM for purchase and a standard HECM for seniors in state.

The key differences concern the properties types that are eligible, the funds needed at closing, the involvement of a realtor in the home loan process, the recommendations of a professional home inspection, and specific settlement costs.

Check out these other pages of information:

Manlove, Arden-Arcade, Perkins, Ramona, Arcade

Eligible Properties

Same as standard HECM mortgages

Ineligible Properties
Cooperative units
Manufactured homes constructed prior to 1976 and lacking permanent foundation
Bed and breakfast properties, boarding houses

What’s the monetary investment requirement?

At closing, HECM borrowers will have to provide a financial investment which is to be applied to fulfill the difference between the HECM principal limit and the sales price for the home, plus any HECM loan related expenses that are not financed or offset by other allowable FHA funding sources. Basically, the proceeds from the reverse mortgage as well as any funds from the sale of the old home (or from the borrower’s personal savings) needs to be enough to purchase the new home outright.

The difference between principal limit and sales price for the home in state also includes any HECM home loan related costs that are not financed or offset by other permitted funding source. Consumers could provide a larger down payment amount as a way to maintain a percentage of HECM proceeds for future draws.

What are allowed financing resources?

Homeowner may only make use of their personal funds or funds obtained from the sale of assets.
Withdrawals from borrower’s savings or pension account are acceptable.

Financial institutions will be required to verify the original source of all the resources in advance of closing. A verification of deposit, along with the latest bank statement, may be used to verify savings and checking accounts. Whether there is a large increase in an account, or the account was opened fairly recently, the mortgage lender will need to get a legitimate explanation of the source of those funds. This kind of documents needs to be supplied in the FHA case binder. Failing to supply the required documentation may lead to a notice of rejection and postponement of endorsement.

Which funding resources are ineligible?

Gifts
Loan discount points
Rate buy downs
Settlement cost assistance
Building contractors incentives
Home owner contributions or home owner financing
Charge card advances
Secured or non-secured loans from another asset (car, home equity)

Consumers will not get a bridge loan (also referred to as “gap financing”) or take part in other temporary financing techniques to fulfill the financial investment obligation or payment of settlement costs required to finalize the purchase transaction. This limitation encompasses subordinate liens, personal loan, cash withdrawals from charge cards, seller financing and any other lending obligations that cannot be satisfied at closing.

What’s the Role 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 home, the house inspection, etc.

Selecting a House 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)

Evaluates the soundness: structure, construction, and mechanical systems
Describes issues that ought to be fixed or replaced prior to the scheduled closing date
Estimates the remaining useful life of the main systems, equipment, structure, and finishes
Buyers can 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’t put any money into repairs before they own the home

Writing an offer

Must state offer contingent on satisfactory inspection done by qualified home inspector
Borrower might wish attorney to review – will increase costs but can be worth it
Client may cancel transaction anytime prior to closing however, this could affect earnest money deposit

Settlement Costs for a

Standard Reverse Loan fees plus:

Recording fees
Transfer taxes
Varies from state-to-state

Other things you need to understand about reverse home loan:

There’s 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 can be paid on the day of closing by the settlement agent. However, FHA encourages loan companies to get 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 will have to enter the transaction into FHA Connection as a new HECM.
HUD-approved housing counseling agencies that have been authorised to provide reverse mortgage counseling, must counsel those that anticipate utilizing the HECM for Purchase option on all topics covered in this Mortgagee Letter and other HUD requirements and issuances.
Financial institutions must ensure the home, when utilized as collateral for the HECM, meets the following property requirements:

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

2) Construction is finished and a occupancy certification or something similar was issued;

3) Any construction home loan financing for the home, 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 liens against the home exist.