A reverse mortgage purchase allows for seniors age 62 or older in state to buy a new house with HECM loan proceeds. The primary benefit to the senior is the transaction only requires one set of settlement costs vs. purchasing a house and getting a reverse mortgage afterwards, which would incur 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 requirements, each of the standard rules apply together with some new guidelines.
What are the basics?
Can purchase existing 1 to 4 unit properties
Property must serve as primary residence
Once HECM purchase is complete, no further liens are permitted (Loan provider in 1st position, HUD in silent 2nd)
Will have to supply monetary investment at closing from allowed funding source, see below for requirements
Must reside in property within 60 days of closing
Newly constructed properties require certificate of occupancy
There are some variations between a HECM for purchase and a standard HECM for seniors in state.
The key distinctions concern the properties types that are permitted, the cash needed at closing, the assistance of a realtor in the mortgage process, the recommendation of a skilled professional house inspection, and certain closing costs.
Check out these other pages of information:
Walnut Trailer Villa, Garden Acres Mobile Home Park, Capitol City Recreational Vehicle and Mobile Home Park, Trails End Mobile Home Park, El Rancho Mobile Park
Permitted Properties
Same as traditional HECM mortgages
Ineligible Properties
Cooperative units
Manufactured homes built before 1976 and lacking permanent foundation
Bed and breakfast properties, boarding houses
What is the financial investment requirement?
At closing, HECM borrowers will need to supply a monetary investment that is to be applied to satisfy the difference between the HECM principal limit and the purchase price for the property, in addition to any HECM loan related fees that are not financed or offset by other allowed FHA funding sources. In other words, the proceeds from the reverse mortgage and any money from the sale of the old property (or from the consumer’s savings) must be sufficient to purchase the new property outright.
The main difference between principal limit and sales price for the property in state includes any HECM mortgage related fees that are not financed or offset by other permitted funding source. Homeowners could provide a larger investment amount as a way to keep a percentage of HECM proceeds for future draws.
What are allowed funding options?
Homeowner may only use their own funds or capital obtained from the sale of property and assets.
Withdrawals from consumer’s savings or retirement account will be satisfactory.
Loan companies are going to be required to validate the source of all money before closing. A verification of deposit, in addition to the latest bank statement, could be used to validate savings and checking accounts. When there’s a considerable increase in an account, or the account was opened up fairly recently, the financial institution will need to obtain a credible explanation of the source of those funds. This sort of documents must be presented in the FHA case binder. Failing to provide the specified documentation may result in a notice of denial and postponement of endorsement.
Which funding sources are ineligible?
Gifts
Loan discount points
Mortgage rate buy downs
Closing cost assistance
Builder incentives
Home owner contributions or homeowner financing
Credit card advances
Secured or non-secured loans from another asset (car, home equity)
Homeowners will not obtain a bridge loan (often known as “gap financing”) or take part in other temporary financing methods to satisfy the monetary investment obligation or payment of closing costs needed to finalize the purchase transaction. This limitation is comprised of subordinate liens, personal loans, cash withdrawals from charge cards, seller financing as well as any other lending obligations that can not be satisfied at closing.
What is the Purpose of the Real Estate Broker?
Seniors in state should consider a written contract – you need to include contingencies for the sale of the senior’s previous house, the home inspection, etc.
Choosing 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 (It is recommended but not mandatory)
Examines the physical condition: structure, construction, and mechanical systems
Describes items that need to be repaired or replaced before the scheduled closing date
Estimates the remaining useful life span of the main systems, equipment, structure, and finishes
Buyers should be at the inspection to ask questions about the condition and maintenance
Required Repairs
Health and safety or architectural integrity issues
Will have to be completed prior to closing by seller
Include in purchase agreement
Buyer can not put any money into repairs before they own the house
Writing an offer
Must state offer conditional on acceptable inspection conducted by qualified home inspector
Borrower might wish attorney to review – increases costs but may be worth it
Client may cancel transaction anytime prior to closing however this could affect earnest money deposit
Settlement Fees for a
Standard Reverse Mortgage settlement fees plus:
Recording fees
Transfer taxes
Varies from state-to-state
Other things you ought to know about reverse mortgage loan:
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 can be paid at the time of closing by the escrow company. However, FHA encourages loan companies to get their counsel’s opinion to ensure compliance with Federal or state laws.
Seller concessions are not 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 lenders will need to enter the transaction into FHA Connection as a new HECM.
HUD-approved housing counseling agencies that have been approved to provide reverse mortgage counseling, must counsel those who anticipate using the HECM for Purchase option on all topics covered in this Mortgagee Letter and other HUD requirements and issuances.
Loan companies will have to be sure that the property, when utilized as collateral for the HECM, meets the following property requirements:
1) It is the borrower’s primary residence;
2) Construction is complete and a CO or similar has been 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, during closing, no other liens against the property exist.