A reverse mortgage purchase enables seniors age 62 or older in state to buy a new house with HECM loan proceeds. The principal benefit to the senior is the purchase only requires one set of closing costs vs. purchasing a house and obtaining a reverse mortgage after, which would have 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 comply with all HECM standards, all the standard regulations apply in combination with some new guidelines.
What are the fundamentals?
Can purchase existing 1 to 4 unit property
Home must serve as primary residence
Once HECM purchase is done, no further liens are allowed (Financial institution in 1st position, HUD in silent 2nd)
Must supply financial investment at closing from allowed funding source, see below for details
Will have to occupy house within Sixty days of closing
Newly built homes will need to have certificate of occupancy
There are several differences between a HECM for purchase and a conventional HECM for seniors in state.
The major distinctions concern the properties types which are permitted, the funds required at closing, the assistance of a realtor in the loan process, the recommendation of a qualified professional house inspection, and certain settlement costs.
Check out these other pages of information:
Garden Acres Mobile Home Park, Riverside Mobile Home Park, Capitol City Recreational Vehicle and Mobile Home Park, Trails End Mobile Home Park, El Rancho Mobile Park
Permitted Properties
Identical to traditional HECM mortgages
Ineligible Properties
Cooperative units
Manufactured homes constructed prior to 1976 and lacking permanent foundation
Bed and breakfast properties, boarding houses
What is the monetary investment requirement?
At closing, HECM borrowers will need to supply a financial investment which is applied to satisfy the difference between the HECM principal limit and the purchase price for the house, as well as any HECM loan connected fees which aren’t financed or offset by other allowable FHA funding sources. In other words, the funds from the reverse mortgage as well as any funds from the sale of the old house (or from the consumer’s personal savings) needs to be adequate to buy the new house outright.
The difference between principal limit and sales price for the house in state includes any HECM loan related costs which aren’t financed or offset by other permitted funding source. Borrowers can provide a larger investment amount so that they can retain a portion of HECM funds for future draws.
What are allowed investment sources?
Consumer may only use their personal capital or capital obtained from selling financial assets.
Withdrawals from consumer’s savings or pension account are satisfactory.
Lenders are going to be required to confirm the source of all resources before closing. A verification of deposit, along with the most up-to-date bank statement, may be used to confirm savings and checking accounts. When there’s a significant increase in an account, or the account was opened recently, the lending company must obtain a legitimate clarification of the source of those funds. This sort of paperwork needs to be presented in the FHA case binder. Failure to produce the required paperwork may lead to a notice of denial and delay of endorsement.
What funding sources are ineligible?
Gifts
Loan discount points
Interest rate buy downs
Closing cost assistance
Builders incentives
Seller contributions or homeowner financing
Charge card advances
Secured or non-secured loans from another asset (car, home equity)
Borrowers may not obtain a bridge loan (often known as “gap financing”) or engage in other temporary financing strategies to satisfy the financial investment requirement or payment of settlement costs needed to complete the purchase transaction. This limitation includes subordinate liens, personal loans, cash withdrawals from credit cards, seller financing and any other lending commitments that can’t be satisfied at closing.
What is the Role of the Realtor?
Seniors in state should consider a written agreement – make sure you include contingencies for the sale of the senior’s previous house, the home inspection, etc.
Deciding on a Property 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 suggested however it is not mandatory)
Examines the soundness: structure, construction, and mechanical systems
Describes items which need to be fixed or replaced prior to the scheduled closing date
Estimates the remaining practical life span of the key 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
Must be finished prior to closing by seller
Include in purchase agreement
Buyer can’t put any cash into repairs before they own the house
Writing an offer
Must state offer contingent on acceptable inspection conducted by qualified inspector
Borrower might want attorney to review – increases costs but will be worth it
Client may cancel transaction at any time prior to closing but this could affect earnest money deposit
Settlement Costs for a
Standard Reverse Home Loan costs plus:
Recording fees
Transfer taxes
Varies from state-to-state
Other things you should consider about reverse mortgage lenders:
There’s no 3 day right of rescission contrary to traditional HECM. The 3-day right of rescission period is not applicable to HECM for Purchase transactions. Consequently, all initial advances could be paid on the day of closing by the escrow company. However, FHA encourages loan companies 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 participate in a HECM for Purchase transaction are ineligible for a decrease in the upfront MIP and mortgage lenders will need to enter in the transaction into FHA Connection as a new HECM.
HUD-approved housing counseling agencies which have been approved to provide reverse mortgage counseling, must counsel individuals who anticipate making use of the HECM for Purchase option on all topics covered in this Mortgagee Letter and other HUD requirements and issuances.
Lenders will need to ensure that the house, when used as collateral for the HECM, meets the following property requirements:
1) It’s the borrower’s primary residence;
2) Construction is finished and a occupancy certification or its equivalent was issued;
3) Any construction loan 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 liens against the house exist.