A reverse mortgage purchase enables seniors age 62 or older in state to buy a new property with HECM loan proceeds. The main benefit to the senior is that the transaction only requires one set of settlement costs vs. purchasing a property and getting a reverse mortgage afterwards, which will incur two complete sets of settlement costs. Created by the Housing and Economic Recovery Act of 2008, this program became live on January 1, 2009. Eligible seniors must conform to all HECM standards, each of the basic guidelines apply along with some new regulations.
A few of the basics?
Can purchase existing 1 to 4 unit properties
House will need to serve as principal residence
Once HECM purchase is finished, no further liens are permitted (Lender in 1st position, HUD in silent 2nd)
Must provide monetary investment at closing from allowed funding source, see below for specifics
Will have to occupy house within 60 days of close of escrow
Newly constructed houses need to have certificate of occupancy
There are several 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 funds needed at close of escrow, the assistance of a realtor in the home loan process, the recommendations of a professional property inspection, and certain closing costs.
Check out these other pages of information:
West Sacramento Trailer Park, Peethill, Casa Mobile Home Park, Bryte Mobile Home Park, Westwind Estates
Permitted Properties
Identical to standard HECM loans
Ineligible Properties
Cooperative units
Manufactured housing built before 1976 and lacking permanent foundation
Bed and breakfast properties, boarding houses
What’s the financial investment requirement?
At close of escrow, HECM borrowers need to produce a monetary investment which is applied to satisfy the difference between the HECM principal limit and the sales 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 funds from the reverse mortgage and any cash from the sale of the old house (or from the borrower’s personal savings) must be sufficient to buy the new house outright.
The primary difference between principal limit and sales price for the house in state also includes any HECM home loan related costs which are not financed or offset by other allowable funding source. Homeowners could provide a larger down payment amount so that they can retain a percentage of HECM funds for future draws.
What are allowed funding options?
Borrower may use their own funds or funds obtained from selling assets.
Withdrawals from borrower’s savings or pension account are generally acceptable.
Financial institutions are going to be required to confirm the source of all money prior to close of escrow. A verification of deposit, together with the most up-to-date bank statement, may be used to confirm savings and checking accounts. When there’s a large increase in an account, or the account was opened up recently, the mortgage lender will need to get a legitimate justification of the source of those funds. This kind of paperwork must be made available in the FHA case binder. Failing to supply the mandatory documents may result in a notice of rejection and delay of endorsement.
What funding sources are ineligible?
Gifts
Loan discount points
Interest rate buy downs
Closing cost assistance
Builders incentives
Seller contributions or homeowner financing
Charge card advances
Secured or non-secured loans from another asset (car, home equity)
Homeowners may not get a bridge loan (also called “gap financing”) or engage in other temporary financing techniques to satisfy the monetary investment obligation or payment of closing costs needed to close the purchase transaction. This restriction is comprised of subordinate liens, personal loan, cash withdrawals from credit cards, seller financing along with other lending commitments that cannot be satisfied at closing.
What’s the Role of the Realtor?
Seniors in state should consider a written arrangement – you need to include contingencies for the sale of the senior’s previous property, the house inspection, etc.
Deciding on a House for Purchase & Obtaining an Inspection
All seniors are strongly encouraged by HUD to have a home inspection from a licensed certified home inspector (This is suggested however it is not mandatory)
Assesses the soundness: structure, construction, and mechanical systems
Identifies issues that should be fixed or replaced before the scheduled close of escrow date
Estimates the remaining useful life span of the main 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 architectural integrity issues
Will have to be completed prior to closing by seller
Include in purchase agreement
Buyer cannot put any cash into repairs before they own the property
Writing an offer
Must state offer conditional on sufficient inspection performed by qualified home inspector
Borrower may wish attorney to review – increases costs but will be worth it
Client can cancel transaction at any time prior to closing but this may affect earnest money deposit
Settlement Costs for a
Standard Reverse Loan fees plus:
Recording fees
Transfer taxes
Varies from state-to-state
Other things you need to know about local reverse mortgage specialist:
There’s 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. As a result, all initial advances could be paid on the day of closing by the escrow officer. However, FHA encourages loan companies 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 loan companies need to enter the transaction into FHA Connection as a new HECM.
HUD-approved housing counseling agencies which are approved to provide reverse mortgage counseling, must counsel those who anticipate making use of the HECM for Purchase option on all topics covered in this Mortgagee Letter and other HUD requirements and issuances.
Financial institutions will need to make sure the house, when utilized as collateral for the HECM, meets the following property requirements:
1) It’s the borrower’s principal residence;
2) Construction is complete and a occupancy certificate or something similar has been issued;
3) Any construction home loan financing for the house, 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 liens against the house exist.