A reverse mortgage purchase makes it possible for seniors age 62 or older in state to buy a new property with HECM loan proceeds. The primary benefit to the senior is that the purchase only requires one set of settlement costs vs. buying a property and obtaining a reverse mortgage afterwards, which will have two complete sets of settlement costs. Created by the Housing and Economic Recovery Act of 2008, the program became live on January 1, 2009. Eligible seniors must abide by all HECM requirements, all of the standard regulations apply in combination with some new regulations and rules.

A few of the fundamentals?

Can purchase existing 1 to 4 unit property
Property must serve as principal residence
Once HECM purchase is complete, no additional liens are permitted (Lender in 1st position, HUD in silent 2nd)
Will have to provide financial investment at closing from allowable funding source, see below for details
Must reside in property within 60 days of close of escrow
Newly constructed houses have to have certificate of occupancy

There are a few variations between a HECM for purchase and a traditional HECM for seniors in state.

The main distinctions concern the properties types which are allowed, the funds needed at close of escrow, the assistance of a real estate broker in the mortgage loan process, the recommendations of a professional property inspection, and certain settlement fees.

Check out these other pages of information:

Fruitridge Manor, Oak Park, Parkway-South Sacramento, Cordova, Brighton

Permitted Properties

Same as regular HECM loans

Ineligible Properties
Cooperative units
Manufactured housing built prior to 1976 and without permanent foundation
Bed and breakfast properties, boarding houses

What is the financial investment requirement?

At close of escrow, HECM borrowers will have to provide a financial investment which is applied to fulfill the difference between the HECM principal limit and the sales price for the property, plus any HECM loan connected fees which aren’t financed or offset by other permitted FHA funding sources. Basically, the funds from the reverse mortgage and any money from the sale of the old property (or from the homeowner’s personal savings) will have to be adequate to buy the new property outright.

The difference between principal limit and sales price for the property in state includes any HECM mortgage loan related fees which aren’t financed or offset by other allowable funding source. Homeowners could provide a larger investment amount as a way to maintain a percentage of HECM funds for future draws.

What are allowable financing sources?

Borrower may use their personal capital or capital obtained from selling assets.
Withdrawals from homeowner’s personal savings or retirement account are generally satisfactory.

Mortgage lenders are going to be required to verify the original source of all the funds before close of escrow. A verification of deposit, in addition to the most up-to-date bank statement, could be used to verify savings and checking accounts. When there’s a considerable increase in an account, or the account was opened up fairly recently, the financial institution must obtain a valid explanation of the source of those funds. Such documents will have to be provided in the FHA case binder. Failure to produce the required documents may result in a notice of rejection and delay of endorsement.

Which funding resources are ineligible?

Gifts
Loan discount points
Interest rate buy downs
Settlement cost assistance
Building contractors incentives
Seller contributions or homeowner financing
Credit card advances
Secured or non-secured loans from another asset (car, home equity)

Homeowners may not obtain a bridge loan (generally known as “gap financing”) or take part in other temporary financing techniques to fulfill the financial investment requirement or payment of settlement fees necessary to close the purchase transaction. This restriction is comprised of subordinate liens, personal loans, cash withdrawals from credit cards, seller financing and also 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 arrangement – it is best to include contingencies for the sale of the senior’s previous property, the home inspection, etc.

Choosing a Home for Purchase & Getting an Home inspection

All seniors are strongly encouraged by HUD to get a home inspection from a licensed qualified home inspector (It’s recommended however it is not mandatory)

Evaluates the soundness: structure, construction, and mechanical systems
Describes issues that should be repaired or replaced before the scheduled close of escrow date
Estimates the remaining useful life of the main 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 architectural integrity issues
Must be completed prior to closing by seller
Include in purchase agreement
Buyer can’t put any cash into repairs before they own the property

Writing an offer

Must state offer contingent on satisfactory inspection done by qualified home inspector
Borrower may wish attorney to review – raises expenses but will be worth it
Client may cancel transaction at any time prior to closing however this may affect earnest money deposit

Closing Costs for a

Standard Home Equity Conversion Mortgage costs plus:

Recording fees
Transfer taxes
Varies from state-to-state

Other things you need to know about reverse mortgage company:

There’s no three day right of rescission unlike traditional HECM. The three-day right of rescission period is not applicable to HECM for Purchase transactions. Therefore, all initial advances may be paid at the time of closing by the settlement agent. However, FHA encourages financial institutions to seek their counsel’s opinion to ensure compliance with Federal or state laws.
Seller incentives aren’t applicable to reverse mortgages.
Existing HECM borrowers who get involved in a HECM for Purchase transaction are ineligible for a decrease in the upfront MIP and loan providers will have to enter the transaction into FHA Connection as a new HECM.
HUD-approved housing counseling agencies which have been authorized to provide reverse mortgage counseling, must counsel individuals who anticipate utilizing the HECM for Purchase option on all topics covered in this Mortgagee Letter and other HUD requirements and issuances.
Mortgage lenders are required to ensure the property, when used as collateral for the HECM, meets the following property requirements:

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

2) Construction is finished and a certificate of occupancy or similar has been issued;

3) Any construction mortgage loan financing for the property, 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, at the time of closing, no liens against the property exist.