A reverse mortgage purchase enables seniors age 62 or older in state to purchase a new home with HECM loan proceeds. The key benefit to the senior is the fact that transaction only involves one set of closing costs vs. purchasing a home 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 comply with all HECM requirements, all of the basic rules apply in addition to some new regulations.
A few of the fundamentals?
Can buy existing 1 to 4 unit property
House will need to serve as principal residence
Once HECM purchase is completed, no additional liens are allowed (Loan provider in 1st position, HUD in silent 2nd)
Must provide financial investment at closing from allowable funding source, see below for details
Will need to live in house within 60 days of close of escrow
Newly built houses needs to have certificate of occupancy
There are several variations between a HECM for purchase and a conventional HECM for seniors in state.
The key differences concern the properties types that are allowed, the funds needed at close of escrow, the involvement of a real estate agent in the home loan process, the recommendations of a certified home inspection, and specific settlement costs.
Check out these other pages of information:
North Sacramento, Ben Ali, Hagginwood, Elvas, Gardenland
Permitted Properties
Identical to traditional HECM mortgages
Ineligible Properties
Cooperative units
Manufactured homes constructed before 1976 and without permanent foundation
Bed and breakfast properties, boarding houses
What’s the monetary investment requirement?
At close of escrow, HECM borrowers will need to supply a financial investment which is applied to satisfy the difference between the HECM principal limit and the purchase price for the house, along with any HECM loan related fees that aren’t financed or offset by other allowed FHA funding sources. In other words, the funds from the reverse mortgage as well as any cash from the sale of the old house (or from the consumer’s savings) must be sufficient to purchase the new house outright.
The main difference between principal limit and sales price for the house in state also includes any HECM home loan related costs that aren’t financed or offset by other permitted funding source. Borrowers could provide a larger down payment amount in order to retain a percentage of HECM funds for future draws.
What are allowable financing options?
Homeowner may use their own funds or capital obtained from the sale of financial assets.
Withdrawals from consumer’s savings or retirement account are generally acceptable.
Lenders are going to be required to validate the origin of all the resources in advance of close of escrow. A verification of deposit, in addition to the most current bank statement, may be used to validate savings and checking accounts. When there is a significant increase in an account, or the account was opened fairly recently, the financial institution will have to get a credible justification of the source of those funds. Such documents must be provided in the FHA case binder. Failing to produce the specified documents may lead to a notice of rejection and postponement of endorsement.
What funding resources are ineligible?
Gifts
Loan discount points
Rate buy downs
Settlement cost assistance
Home builder incentives
Seller contributions or property owner financing
Credit card advances
Secured or non-secured loans from another asset (car, home equity)
Borrowers may not get a bridge loan (generally known as “gap financing”) or participate in other temporary financing techniques to satisfy the financial investment requirement or payment of settlement costs needed to complete the purchase transaction. This restriction includes subordinate liens, personal loan, cash withdrawals from charge cards, seller financing along with other lending commitments that can not be satisfied at closing.
What’s the Function of the Real Estate Broker?
Seniors in state must consider a written arrangement – it is best to include contingencies for the sale of the senior’s previous home, the home inspection, etc.
Choosing a Home for Purchase & Getting an Home inspection
All seniors are strongly encouraged by HUD to get a home inspection from a licensed qualified home inspector (This is recommended but is not mandatory)
Examines the physical condition: structure, construction, and mechanical systems
Determines items which ought to be fixed or replaced before the scheduled close of escrow date
Estimates the remaining practical life of the major systems, equipment, structure, and finishes
Buyers should be at the inspection to ask questions regarding the condition and maintenance
Required Repairs
Health and safety or structural integrity issues
Needs to be completed prior to closing by seller
Include in purchase agreement
Buyer cannot put any money into repairs before they own the home
Writing an offer
Must state offer conditional on sufficient inspection performed by qualified home inspector
Borrower may want attorney to review – increases expenses but may be worth it
Client can cancel transaction anytime prior to closing however, this could affect earnest money deposit
Settlement Costs for a
Standard Reverse Mortgage fees plus:
Recording fees
Transfer taxes
Varies from state-to-state
Other things you need to know about Home Equity Conversion Mortgage in California:
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. Consequently, all initial advances can be disbursed on the day of closing by the escrow officer. However, FHA encourages loan companies to seek their counsel’s opinion to ensure 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 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 which have been authorised 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.
Lenders are required to ensure that the house, when used as collateral for the HECM, satisfies the following property requirements:
1) It’s the borrower’s principal residence;
2) Construction is finished and a occupancy certificate or its equivalent was issued;
3) Any construction home 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, during closing, no other liens against the house exist.