A reverse mortgage purchase allows for seniors age 62 or older in state to buy a new house with HECM loan proceeds. The main benefit to the senior is the transaction only requires one set of closing costs vs. purchasing a house and obtaining a reverse mortgage after, which will have two complete sets of closing costs. Created by the Housing and Economic Recovery Act of 2008, this program became live on January 1, 2009. Qualified seniors must adhere to all HECM standards, all of the basic rules apply together with some new regulations.
What are the basics?
Can purchase existing 1 to 4 unit property
House must serve as primary residence
Once HECM purchase is done, no additional liens are permitted (Financial institution in 1st position, HUD in silent 2nd)
Will have to provide monetary investment at closing from allowed funding source, see below for information and facts
Will need to occupy house within 60 days of closing
Newly constructed homes needs to have certificate of occupancy
There are several variations between a HECM for purchase and a classic HECM for seniors in state.
The key differences concern the properties types that are eligible, the funds required at closing, the assistance of a real estate professional in the mortgage loan process, the recommendation of a professional house inspection, and certain settlement fees.
Check out these other pages of information:
Capitol City Recreational Vehicle and Mobile Home Park, Capri Mobile Home Park, Riverside Mobile Home Park, Walnut Trailer Villa, Garden Acres Mobile Home Park
Permitted Properties
Same as conventional HECM mortgages
Ineligible Properties
Cooperative units
Manufactured homes constructed before 1976 and without permanent foundation
Bed and breakfast properties, boarding houses
What is the money investment requirement?
At closing, HECM borrowers will have to produce a monetary investment that will be applied to fulfill the difference between the HECM principal limit and the purchase price for the house, as well as any HECM loan connected fees 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 house (or from the homeowner’s savings account) has to be sufficient to buy the new house outright.
A real difference between principal limit and sales price for the house in state includes any HECM mortgage loan related costs which are not financed or offset by other allowable funding source. Consumers may provide a larger investment amount so that they can keep a percentage of HECM proceeds for future draws.
What are allowed investment sources?
Borrower may only use their personal money or funds obtained from selling properties and assets.
Withdrawals from homeowner’s personal savings or retirement account are usually acceptable.
Lenders are going to be required to confirm the original source of all resources in advance of closing. A verification of deposit, along with the most current bank statement, could be used to confirm savings and checking accounts. If there is a considerable increase in an account, or the account was opened up recently, the mortgage lender will have to get a credible explanation of the source of those funds. Such paperwork has to be presented in the FHA case binder. Failure to produce the necessary documents may lead to a notice of denial and postponement of endorsement.
What funding sources are ineligible?
Gifts
Loan discount points
Rate buy downs
Closing cost assistance
Builders incentives
Home owner contributions or homeowner financing
Credit card advances
Secured or non-secured loans from another asset (car, home equity)
Consumers may not get a bridge loan (also called “gap financing”) or engage in other interim financing techniques to meet the monetary investment requirement or payment of settlement fees necessary to close the purchase transaction. This limitation may include subordinate liens, personal loan, cash withdrawals from credit cards, seller financing as well as any other lending obligations that can not be satisfied at closing.
What is the Role of the Real Estate Broker?
Seniors in state should consider a written arrangement – it is best to include contingencies for the sale of the senior’s previous house, the property inspection, etc.
Selecting a Property for Purchase & Getting an Inspection
All seniors are strongly encouraged by HUD to get a home inspection from a licensed skilled professional home inspector (This is suggested but is not mandatory)
Assesses the soundness: structure, construction, and mechanical systems
Identifies items that should be fixed or replaced before the scheduled closing date
Estimates the remaining practical life span of the main systems, equipment, structure, and finishes
Buyers could be at the inspection to ask questions regarding the condition and maintenance
Required Repairs
Health and safety or structural integrity issues
Need to be completed prior to closing by seller
Include in purchase agreement
Buyer cannot put any cash into repairs before they own the house
Writing an offer
Must state offer conditional on sufficient inspection done by qualified inspector
Borrower may wish attorney to review – will increase costs but may be worth it
Client can cancel transaction any time prior to closing but 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 reverse mortgage loans:
There is no three day right of rescission contrary to traditional HECM. The three-day right of rescission period is not applicable to HECM for Purchase transactions. Consequently, all initial advances could be paid at the time of closing by the settlement agent. However, FHA encourages lenders to seek their counsel’s opinion to assure compliance with Federal or state laws.
Seller incentives aren’t applicable to reverse mortgages.
Existing HECM borrowers who engage in a HECM for Purchase transaction are ineligible for a reduction of the upfront MIP and financial institutions will have to enter the transaction into FHA Connection as a new HECM.
HUD-approved housing counseling agencies which have been accredited 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.
Lenders are required to be sure 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 certificate of occupancy or something similar was issued;
3) Any construction mortgage loan financing for the house, 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 other liens against the house exist.