A reverse mortgage purchase enables seniors age 62 or older in state to buy a new house with HECM loan proceeds. The main benefit to the senior is the purchase only involves one set of closing costs vs. buying 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. Eligible seniors must adhere to all HECM standards, all of the standard rules apply in combination with some new regulations.
What are the basics?
Can purchase existing 1 to 4 unit property
House must serve as principal residence
Once HECM purchase is completed, no additional liens are permitted (Financial institution in 1st position, HUD in silent 2nd)
Will have to supply financial investment at closing from permitted funding source, see below for specifics
Must live in property within Sixty days of close of escrow
Newly constructed homes must have certificate of occupancy
There are some differences between a HECM for purchase and a standard HECM for seniors in state.
The key differences concern the properties types which are qualified, the money needed at close of escrow, the involvement of a realtor in the mortgage process, the recommendations of a qualified house inspection, and certain settlement costs.
Check out these other pages of information:
Broderick, Peethill, Casa Mobile Home Park, West Sacramento, Westwind Estates
Permitted Properties
Identical to standard HECM loans
Ineligible Properties
Cooperative units
Manufactured housing constructed prior to 1976 and lacking permanent foundation
Bed and breakfast properties, boarding houses
What’s the monetary investment requirement?
At close of escrow, HECM borrowers must produce a financial investment that will be applied to satisfy the difference between the HECM principal limit and the sales price for the property, along with any HECM loan associated expenses that aren’t financed or offset by other allowed FHA funding sources. Basically, the funds from the reverse mortgage as well as any cash from the sale of the old property (or from the homeowner’s personal savings) must be adequate to purchase the new property outright.
The difference between principal limit and sales price for the property in state also includes any HECM mortgage related costs that aren’t financed or offset by other allowable funding source. Borrowers could provide a larger down payment amount as a way to maintain a percentage of HECM funds for future draws.
What are permitted financing resources?
Consumer can only use their own funds or capital obtained from the sale of assets.
Withdrawals from homeowner’s personal savings or retirement account will be satisfactory.
Financial institutions will be required to validate the original source of all money before close of escrow. A verification of deposit, together with the most recent bank statement, could be used to validate savings and checking accounts. When there is a substantial increase in an account, or the account was opened up recently, the mortgage lender must obtain a legitimate clarification of the source of those funds. This sort of documentation must be supplied in the FHA case binder. Failure to provide the necessary paperwork could lead to a notice of rejection and delay of endorsement.
Which funding sources are ineligible?
Gifts
Loan discount points
Interest rate buy downs
Closing cost assistance
Home builder incentives
Home owner contributions or property owner financing
Charge card advances
Secured or non-secured loans from another asset (car, home equity)
Borrowers may not obtain a bridge loan (also known as “gap financing”) or engage in other interim financing strategies to fulfill the financial investment obligation or payment of settlement costs necessary to finalize the purchase transaction. This restriction 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’s the Function of the Real Estate Broker?
Seniors in state must consider a written contract – it is best to include contingencies for the sale of the senior’s previous house, the home inspection, etc.
Choosing a Home for Purchase & Getting an Home inspection
All seniors are strongly encouraged by HUD to have a home inspection from a licensed certified home inspector (This is suggested but is not required)
Examines the physical condition: structure, construction, and mechanical systems
Identifies items that should be fixed or replaced before the scheduled close of escrow 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 structural integrity issues
Have to be completed prior to closing by seller
Include in purchase agreement
Buyer cannot put any money into repairs before they own the house
Writing an offer
Must state offer contingent on sufficient inspection conducted by qualified home inspector
Borrower may want attorney to review – raises costs but can be worth it
Client may cancel transaction anytime prior to closing however this could affect earnest money deposit
Settlement Fees for a
Standard Reverse Home Loan settlement fees plus:
Recording fees
Transfer taxes
Varies from state-to-state
Other things you need to know about reverse mortgage experts:
There is no three day right of rescission unlike traditional HECM. The three-day right of rescission period isn’t applicable to HECM for Purchase transactions. Consequently, all initial advances can be paid on the day of closing by the escrow company. However, FHA encourages financial institutions 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 participate in a HECM for Purchase transaction are ineligible for a decrease in the upfront MIP and lenders must enter the transaction into FHA Connection as a new HECM.
HUD-approved housing counseling agencies which are authorized to provide reverse mortgage counseling, must counsel people who anticipate using the HECM for Purchase option on all topics covered in this Mortgagee Letter and other HUD requirements and issuances.
Financial institutions must make sure the property, when utilized as collateral for the HECM, satisfies 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 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 other liens against the property exist.