A reverse mortgage purchase allows for seniors age 62 or older in state to buy a new house with HECM loan proceeds. The main benefit to the senior is that the transaction only involves one set of closing costs vs. buying a house and getting a reverse mortgage after, which will incur two complete sets of closing costs. Developed by the Housing and Economic Recovery Act of 2008, the program became live on January 1, 2009. Eligible seniors must abide by all HECM standards, all the basic rules apply in combination with a few new rules and regulations.

What are the fundamentals?

Can purchase existing 1 to 4 unit properties
House must serve as principal residence
Once HECM purchase is finished, no further liens are acceptable (Lender in 1st position, HUD in silent 2nd)
Must supply financial investment at closing from permitted funding source, see below for details
Need to reside in house within Sixty days of close of escrow
Newly built houses have to have certificate of occupancy

There are some variations between a HECM for purchase and a classic 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 real estate professional in the mortgage process, the recommendations of a qualified house inspection, and specific settlement costs.

Check out these other pages of information:

Ramona, Perkins, Polk, Fruitridge Manor, Fruitridge Pocket

Permitted Properties

Identical to traditional HECM mortgages

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 will have to provide a financial investment which is to be applied to fulfill the difference between the HECM principal limit and the sales price for the house, in addition to any HECM loan connected expenses that are not financed or offset by other allowable FHA funding sources. Basically, the funds from the reverse mortgage as well as any money from the sale of the old house (or from the borrower’s savings) must be sufficient to purchase the new house outright.

The difference between principal limit and sales price for the house in state also includes any HECM mortgage related fees that are not financed or offset by other allowable funding source. Consumers can provide a larger down payment amount so that they can keep a percentage of HECM funds for future draws.

What are permitted funding options?

Homeowner can only use their own capital or funds obtained from selling assets.
Withdrawals from borrower’s personal savings or retirement account are acceptable.

Loan companies will be required to verify the source of all the funds before close of escrow. A verification of deposit, along with the latest bank statement, may be used to verify savings and checking accounts. Whether there is a significant increase in an account, or the account was opened fairly recently, the mortgage lender will need to get a legitimate clarification of the source of those funds. This sort of paperwork must be supplied in the FHA case binder. Failing to produce the specified paperwork may result in a notice of rejection and delay of endorsement.

Which funding sources are ineligible?

Gifts
Loan discount points
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)

Consumers may not get a bridge loan (generally known as “gap financing”) or take part in other interim financing techniques to meet the financial investment obligation or payment of settlement costs needed to complete the purchase transaction. This restriction includes subordinate liens, personal loans, cash withdrawals from charge cards, seller financing and 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 agreement – make sure you include contingencies for the sale of the senior’s previous house, the house inspection, etc.

Deciding on a Home for Purchase & Getting an Home inspection

All seniors are strongly encouraged by HUD to have a home inspection from a licensed qualified home inspector (This is advised but not required)

Assesses the soundness: structure, construction, and mechanical systems
Determines items which should be fixed or replaced prior to the scheduled close of escrow date
Estimates the remaining useful life span of the main 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 architectural integrity issues
Have to be finished prior to closing by seller
Include in purchase agreement
Buyer can’t put any money into repairs before they own the house

Writing an offer

Must state offer conditional on acceptable inspection performed by qualified inspector
Borrower may want attorney to review – increases costs but will be worth it
Client can cancel transaction at any time before closing however, this could affect earnest money deposit

Settlement Fees for a

Standard Reverse Home Loan settlement costs plus:

Recording fees
Transfer taxes
Varies from state-to-state

Other things you need to know about local reverse mortgage experts:

There’s no 3 day right of rescission contrary to traditional HECM. The 3-day right of rescission period is not applicable to HECM for Purchase transactions. As a result, all initial advances may be paid at the time of closing by the escrow company. However, FHA encourages loan companies to get their counsel’s opinion to assure compliance with Federal or state laws.
Seller concessions are not 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 loan companies will have 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 individuals 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 ensure the house, when used as collateral for the HECM, meets the following property requirements:

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

2) Construction is completed and a CO or its equivalent was issued;

3) Any construction mortgage 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 other liens against the house exist.