A reverse mortgage purchase allows for 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 involves one set of settlement costs vs. buying a home and obtaining a reverse mortgage after, 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 adhere to all HECM standards, all of the basic guidelines apply in addition to a few new regulations.
What are the basics?
Can purchase existing 1 to 4 unit property
Property will need to serve as principal residence
Once HECM purchase is done, no additional liens are permitted (Loan provider in 1st position, HUD in silent 2nd)
Will have to supply financial investment at closing from permitted funding source, see below for details
Will need to reside in property within Sixty days of closing
Newly constructed properties have 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 which are allowed, the money needed at closing, the involvement of a real estate broker in the mortgage process, the recommendation of a certified home inspection, and specific closing costs.
Check out these other pages of information:
Parkway-South Sacramento, Parkway, Pollock, Fruitridge Pocket, Fruitridge Manor
Eligible Properties
Identical to regular HECM mortgages
Ineligible Properties
Cooperative units
Manufactured housing constructed before 1976 and without permanent foundation
Bed and breakfast properties, boarding houses
What is the financial investment requirement?
At closing, HECM borrowers will need to supply a financial investment which is to be applied to fulfill the difference between the HECM principal limit and the purchase price for the property, along with any HECM loan associated expenses which are not financed or offset by other permitted FHA funding sources. Basically, the proceeds from the reverse mortgage and any money from the sale of the old property (or from the consumer’s savings) needs to be sufficient to buy the new property outright.
The primary difference between principal limit and sales price for the property in state also includes any HECM mortgage related costs which are not financed or offset by other permitted funding source. Borrowers could provide a larger investment amount as a way to keep a percentage of HECM proceeds for future draws.
What are permitted funding options?
Consumer may make use of their personal money or cash obtained from selling assets.
Withdrawals from consumer’s personal savings or pension account are generally satisfactory.
Mortgage lenders will be required to validate the origin of all the resources prior to closing. A verification of deposit, together with the most recent bank statement, may be used to validate savings and checking accounts. When there’s a substantial increase in an account, or the account was opened up recently, the financial institution must obtain a credible explanation of the source of those funds. This sort of documentation needs to be supplied in the FHA case binder. Failure to produce the specified documentation may lead to a notice of denial and postponement of endorsement.
What funding sources are ineligible?
Gifts
Loan discount points
Interest rate buy downs
Closing cost assistance
Building contractors incentives
Seller contributions or property owner financing
Credit card advances
Secured or non-secured loans from another asset (car, home equity)
Borrowers will not obtain a bridge loan (generally known as “gap financing”) or participate in other temporary financing strategies to meet the financial investment obligation or payment of closing costs required to finalize the purchase transaction. This limitation may include subordinate liens, personal loans, cash withdrawals from credit cards, seller financing and also any other lending commitments that cannot 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 home, 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 professional home inspector (It’s advised but not mandatory)
Evaluates the physical condition: structure, construction, and mechanical systems
Identifies items that need to be fixed or replaced before the scheduled closing date
Estimates the remaining useful life of the key systems, equipment, structure, and finishes
Buyers could be at the inspection to ask questions about the condition and maintenance
Required Repairs
Health and safety or structural integrity issues
Need to be finished prior to closing by seller
Include in purchase agreement
Buyer cannot put any money into repairs before they own the home
Writing an offer
Must state offer contingent on sufficient inspection done by qualified inspector
Borrower might wish attorney to review – will increase fees but will be worth it
Client may cancel transaction at any time before closing however, this may affect earnest money deposit
Closing Costs for a
Standard Home Equity Conversion Mortgage settlement fees plus:
Recording fees
Transfer taxes
Varies from state-to-state
Other things you should know about reverse mortgage loan in California:
There is 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 could be paid on the day of closing by the escrow officer. However, FHA encourages lenders 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 take part in a HECM for Purchase transaction are ineligible for a decrease in the upfront MIP and mortgage companies will need 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 using the HECM for Purchase option on all topics covered in this Mortgagee Letter and other HUD requirements and issuances.
Mortgage lenders need to ensure the property, when used as collateral for the HECM, meets the following property requirements:
1) It is the borrower’s principal residence;
2) Construction is complete and a CO or similar was issued;
3) Any construction mortgage 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.