A reverse mortgage purchase allows for seniors age 62 or older in state to purchase a new property with HECM loan proceeds. The primary benefit to the senior is the fact that purchase only requires one set of settlement costs vs. buying a property and obtaining a reverse mortgage thereafter, which will have two complete sets of settlement costs. Created by the Housing and Economic Recovery Act of 2008, the program became live on January 1, 2009. Qualified seniors must abide by all HECM requirements, all of the basic guidelines apply together with a few new regulations.
A few of the basics?
Can buy existing 1 to 4 unit properties
House will need to serve as principal residence
Once HECM purchase is finished, no additional liens are allowed (Financial institution in 1st position, HUD in silent 2nd)
Will have to supply financial investment at closing from allowable funding source, see below for information and facts
Will need to live in house within 60 days of close of escrow
Newly constructed homes need to have certificate of occupancy
There are some differences between a HECM for purchase and a conventional HECM for seniors in state.
The main differences concern the properties types which are eligible, the cash required at close of escrow, the assistance of a real estate agent in the home loan process, the recommendation of a certified property inspection, and certain settlement fees.
Check out these other pages of information:
El Rancho Mobile Park, Casa Mobile Home Park, Peethill, Garden Acres Mobile Home Park, Riverside Mobile Home Park
Permitted Properties
Same as traditional HECM loans
Ineligible Properties
Cooperative units
Manufactured homes constructed before 1976 and lacking permanent foundation
Bed and breakfast properties, boarding houses
What is the monetary investment requirement?
At close of escrow, HECM borrowers must provide a financial investment which is to be applied to fulfill the difference between the HECM principal limit and the purchase price for the house, along with any HECM loan related expenses that aren’t financed or offset by other allowed FHA funding sources. This means that, the funds from the reverse mortgage and any funds from the sale of the old house (or from the homeowner’s savings) needs to 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 fees that aren’t financed or offset by other allowable funding source. Borrowers could provide a larger down payment amount to be able to retain a portion of HECM funds for future draws.
What are allowable funding sources?
Consumer can only use their personal funds or capital obtained from selling assets.
Withdrawals from homeowner’s personal savings or retirement account are satisfactory.
Mortgage companies will be required to validate the original source of all funds in advance of close of escrow. A verification of deposit, along with the latest bank statement, may be used to validate savings and checking accounts. Whether there is a substantial increase in an account, or the account was opened fairly recently, the lender must obtain a valid explanation of the source of those funds. This type of documentation needs to be provided in the FHA case binder. Failing to provide the required documentation may result in a notice of denial and postponement of endorsement.
Which funding resources are ineligible?
Gifts
Loan discount points
Interest rate buy downs
Closing cost assistance
Builder incentives
Home owner contributions or property owner financing
Charge card advances
Secured or non-secured loans from another asset (car, home equity)
Borrowers may not obtain a bridge loan (also called “gap financing”) or take part in other interim financing methods to fulfill the financial investment obligation or payment of settlement fees needed to complete the purchase transaction. This limitation may include 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 should consider a written agreement – make sure you include contingencies for the sale of the senior’s previous property, the house inspection, etc.
Choosing a Property for Purchase & Obtaining an Inspection
All seniors are strongly encouraged by HUD to have a home inspection from a licensed certified home inspector (It is suggested but not required)
Examines the physical condition: structure, construction, and mechanical systems
Determines items which should be fixed or replaced before the scheduled close of escrow date
Estimates the remaining practical life span of the major systems, equipment, structure, and finishes
Buyers can be at the inspection to ask questions about the condition and maintenance
Required Repairs
Health and safety or structural integrity issues
Have to be completed prior to closing by seller
Include in purchase agreement
Buyer can not put any money into repairs before they own the property
Writing an offer
Must state offer contingent on sufficient inspection conducted by qualified inspector
Borrower might wish attorney to review – raises fees but may be worth it
Client may cancel transaction at any time prior to closing however this may affect earnest money deposit
Settlement Costs for a
Standard HECM fees plus:
Recording fees
Transfer taxes
Varies from state-to-state
Other things you should know about FHA reverse mortgage:
There is 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. Consequently, all initial advances could be paid at the time of closing by the escrow company. However, FHA encourages financial institutions to seek their counsel’s opinion to ensure compliance with Federal or state laws.
Seller concessions aren’t applicable to reverse mortgages.
Existing HECM borrowers who take part in a HECM for Purchase transaction are ineligible for a reduction of the upfront MIP and financial institutions must enter in 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 that anticipate using the HECM for Purchase option on all topics covered in this Mortgagee Letter and other HUD requirements and issuances.
Mortgage companies are required to be sure that 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 complete and a C of O or similar has been 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, at the time of closing, no other liens against the house exist.