A reverse mortgage purchase enables seniors age 62 or older in state to purchase a new property with HECM loan proceeds. The key benefit to the senior is that the purchase only involves one set of settlement costs vs. buying a property and getting a reverse mortgage thereafter, 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 comply with all HECM standards, all of the basic rules apply along with a few new guidelines.

What are the fundamentals?

Can buy existing 1 to 4 unit properties
Home will need to serve as primary residence
Once HECM purchase is done, no additional liens are allowed (Financial institution in 1st position, HUD in silent 2nd)
Will need to supply financial investment at closing from allowed funding source, see below for requirements
Need to occupy home within Sixty days of closing
Newly built properties needs 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 differences concern the properties types which are eligible, the money needed at closing, the involvement of a realtor in the loan process, the recommendations of a certified property inspection, and specific settlement costs.

Check out these other pages of information:

Hagginwood, Ben Ali, Town and Country Village, Robla, Swanston

Permitted Properties

Same as regular HECM mortgages

Ineligible Properties
Cooperative units
Manufactured homes constructed before 1976 and without permanent foundation
Bed and breakfast properties, boarding houses

What’s the financial investment requirement?

At closing, HECM borrowers will need to provide a financial investment that is to be applied to fulfill the difference between the HECM principal limit and the sales price for the home, in addition to any HECM loan connected fees which are not financed or offset by other allowed FHA funding sources. This means that, the proceeds from the reverse mortgage and any funds from the sale of the old home (or from the consumer’s savings) needs to be enough to buy the new home outright.

The difference between principal limit and sales price for the home in state includes any HECM loan related costs which are not financed or offset by other allowable funding source. Borrowers could provide a larger investment amount as a way to keep a percentage of HECM proceeds for future draws.

What are allowed funding resources?

Borrower may use their own money or cash obtained from the sale of properties and assets.
Withdrawals from consumer’s savings or pension account are satisfactory.

Loan companies will be required to validate the source of all resources in advance of closing. A verification of deposit, in addition to the latest bank statement, may 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 legitimate clarification of the source of those funds. This type of documentation needs to be provided in the FHA case binder. Failure to provide the necessary paperwork could lead to a notice of denial and delay of endorsement.

Which funding resources are ineligible?

Gifts
Loan discount points
Interest rate buy downs
Settlement cost assistance
Home builder incentives
Home owner contributions or seller financing
Charge card advances
Secured or non-secured loans from another asset (car, home equity)

Borrowers will not obtain a bridge loan (also referred to as “gap financing”) or participate in other temporary financing techniques to satisfy the financial investment obligation or payment of settlement costs required to complete the purchase transaction. This restriction is comprised of subordinate liens, personal loans, cash withdrawals from charge cards, seller financing and any other lending commitments that can’t be satisfied at closing.

What’s the Job of the Real Estate Broker?

Seniors in state should consider a written contract – it is best to include contingencies for the sale of the senior’s previous property, the house inspection, etc.

Selecting a Home for Purchase & Getting an Home inspection

All seniors are strongly encouraged by HUD to have a home inspection from a licensed skilled professional home inspector (It’s advised but is not mandatory)

Evaluates the soundness: structure, construction, and mechanical systems
Describes items that should be repaired or replaced prior to 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 cannot put any money into repairs before they own the property

Writing an offer

Must state offer conditional on satisfactory inspection performed by qualified inspector
Borrower may wish attorney to review – increases expenses but may be worth it
Client may cancel transaction anytime before closing however, this could affect earnest money deposit

Settlement Costs for a

Standard Reverse Loan closing costs plus:

Recording fees
Transfer taxes
Varies from state-to-state

Other things you should know about local reverse mortgage:

There is no three day right of rescission contrary to traditional HECM. The three-day right of rescission period isn’t applicable to HECM for Purchase transactions. As a result, all initial advances can be paid on the day of closing by the settlement agent. However, FHA encourages loan companies to get their counsel’s opinion to assure 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 reduction of the upfront MIP and financial institutions will need to enter in the transaction into FHA Connection as a new HECM.
HUD-approved housing counseling agencies that have been accredited 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.
Loan companies will have to make sure the home, when used as collateral for the HECM, satisfies the following property requirements:

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

2) Construction is complete and a C of O or its equivalent was issued;

3) Any construction loan financing for the home, 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 home exist.