A reverse mortgage purchase allows seniors age 62 or older in state to buy a new house with HECM loan proceeds. The primary benefit to the senior is the purchase only requires one set of settlement costs vs. buying a house and obtaining a reverse mortgage afterwards, which will incur two complete sets of settlement costs. Developed by the Housing and Economic Recovery Act of 2008, this program became live on January 1, 2009. Qualified seniors must comply with all HECM standards, all of the basic rules apply in combination with a few new regulations.

A few of the fundamentals?

Can purchase existing 1 to 4 unit properties
House will need to serve as principal residence
Once HECM purchase is complete, no additional liens are permitted (Financial institution 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 property within Sixty days of close of escrow
Newly built houses must have certificate of occupancy

There are some variations between a HECM for purchase and a classic HECM for seniors in state.

The main distinctions concern the properties types that are allowed, the cash required at close of escrow, the involvement of a real estate broker in the loan process, the recommendations of a qualified house inspection, and certain settlement costs.

Check out these other pages of information:

Riverside Mobile Home Park, Garden Acres Mobile Home Park, Walnut Trailer Villa, West Sacramento, Trails End Mobile Home Park

Eligible Properties

Identical to traditional HECM loans

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

What is the financial investment requirement?

At close of escrow, HECM borrowers must produce a financial investment which will be applied to fulfill the difference between the HECM principal limit and the sales price for the property, along with any HECM loan related fees that are not financed or offset by other permitted FHA funding sources. Basically, the proceeds from the reverse mortgage as well as any money from the sale of the old property (or from the homeowner’s savings) needs to be enough to buy the new property outright.

The difference between principal limit and sales price for the property in state also includes any HECM loan related costs that are not financed or offset by other allowable funding source. Consumers may provide a larger down payment amount in order to keep a percentage of HECM proceeds for future draws.

What are allowable financing resources?

Borrower may use their personal money or funds obtained from selling properties and assets.
Withdrawals from homeowner’s personal savings or retirement account are usually satisfactory.

Lenders are going to be required to validate the original source of all funds before close of escrow. A verification of deposit, along with the most recent bank statement, could be used to validate savings and checking accounts. If there is a significant increase in an account, or the account was opened up recently, the mortgage lender will need to get a credible justification of the source of those funds. This sort of documentation needs to be made available in the FHA case binder. Failing to produce the necessary paperwork may result in a notice of denial and delay of endorsement.

Which funding sources are ineligible?

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

Consumers will not get a bridge loan (often known as “gap financing”) or take part in other interim financing methods to meet the financial investment requirement or payment of settlement costs necessary to close the purchase transaction. This restriction includes subordinate liens, unsecured loans, cash withdrawals from charge cards, seller financing and also any other lending obligations that can not be satisfied at closing.

What is the Purpose of the Realtor?

Seniors in state must consider a written contract – you should include contingencies for the sale of the senior’s previous house, the house inspection, etc.

Deciding on a House for Purchase & Obtaining an Home inspection

All seniors are strongly encouraged by HUD to get a home inspection from a licensed certified home inspector (It is recommended however it is not required)

Assesses the soundness: structure, construction, and mechanical systems
Determines items which ought to be repaired or replaced before the scheduled close of escrow date
Estimates the remaining practical life span of the main 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 can not put any money into repairs before they own the house

Writing an offer

Must state offer conditional on satisfactory inspection performed by qualified home inspector
Borrower might want attorney to review – will increase costs but may be worth it
Client may cancel transaction at any time prior to closing but this could affect earnest money deposit

Settlement Fees for a

Standard Home Equity Conversion Mortgage costs plus:

Recording fees
Transfer taxes
Varies from state-to-state

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

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. Therefore, all initial advances may be disbursed at the time of closing by the escrow company. However, FHA encourages loan companies to get their counsel’s opinion to ensure compliance with Federal or state laws.
Seller concessions are not 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 mortgage 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 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.
Lenders will have to make sure the property, when used as collateral for the HECM, meets the following property requirements:

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

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

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