A reverse mortgage purchase enables seniors age 62 or older in state to purchase 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. purchasing a house and obtaining a reverse mortgage afterwards, 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. Qualified seniors must abide by all HECM standards, all of the standard regulations apply in addition to some new rules and regulations.
A few of the fundamentals?
Can purchase existing 1 to 4 unit property
House must serve as principal residence
Once HECM purchase is finished, no further liens are permitted (Loan provider in 1st position, HUD in silent 2nd)
Will have to provide financial investment at closing from permitted funding source, see below for details
Must reside in house within 60 days of closing
Newly built properties must have certificate of occupancy
There are a few variations between a HECM for purchase and a classic HECM for seniors in state.
The key distinctions concern the properties types that are allowed, the funds required at closing, the involvement of a real estate agent in the mortgage loan process, the recommendation of a qualified professional house inspection, and certain closing costs.
Check out these other pages of information:
Folsom Junction, Folsom, Natoma, Alder Creek, Fair Oaks
Permitted Properties
Identical to traditional HECM mortgages
Ineligible Properties
Cooperative units
Manufactured homes built prior to 1976 and lacking permanent foundation
Bed and breakfast properties, boarding houses
What’s the money investment requirement?
At closing, HECM borrowers will need to produce a financial investment that will be applied to satisfy the difference between the HECM principal limit and the sales price for the house, as well as any HECM loan associated fees which aren’t financed or offset by other permitted FHA funding sources. This means that, the proceeds from the reverse mortgage as well as any cash from the sale of the old house (or from the consumer’s personal savings) will have to be sufficient to buy the new house outright.
A real difference between principal limit and sales price for the house in state also includes any HECM mortgage loan related fees which aren’t financed or offset by other permitted funding source. Consumers could provide a larger down payment amount as a way to keep a portion of HECM proceeds for future draws.
What are permitted investment sources?
Homeowner may only use their own capital or cash obtained from selling property and assets.
Withdrawals from consumer’s savings or pension account are satisfactory.
Mortgage companies are going to be required to confirm the source of all the resources before closing. A verification of deposit, together with the latest bank statement, could be used to confirm savings and checking accounts. Whether there is a large increase in an account, or the account was opened up recently, the lender will have to get a valid clarification of the source of those funds. This sort of paperwork will have to be presented in the FHA case binder. Failure to produce the mandatory documents could lead to a notice of rejection and postponement of endorsement.
What funding sources 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)
Consumers will not get a bridge loan (also referred to as “gap financing”) or take part in other interim financing techniques to satisfy the financial investment obligation or payment of closing costs required to close the purchase transaction. This restriction encompasses subordinate liens, personal loan, cash withdrawals from credit cards, seller financing along with other lending obligations that can not be satisfied at closing.
What’s the Role of the Real Estate Broker?
Seniors in state must consider a written agreement – you should include contingencies for the sale of the senior’s previous house, the home inspection, etc.
Choosing a House for Purchase & Obtaining an Inspection
All seniors are strongly encouraged by HUD to get a home inspection from a licensed professional home inspector (This is recommended but is not required)
Examines the physical condition: structure, construction, and mechanical systems
Identifies items that should be fixed or replaced prior to the scheduled closing date
Estimates the remaining practical life of the major 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 finished prior to closing by seller
Include in purchase agreement
Buyer cannot put any cash into repairs before they own the house
Writing an offer
Must state offer conditional on acceptable inspection done by qualified home inspector
Borrower might wish attorney to review – increases expenses but can be worth it
Client may cancel transaction anytime prior to closing but this could affect earnest money deposit
Closing Costs for a
Standard HECM fees plus:
Recording fees
Transfer taxes
Varies from state-to-state
Other things you should know about local reverse mortgage expert:
There’s no three day right of rescission unlike traditional HECM. The three-day right of rescission period is not applicable to HECM for Purchase transactions. As a result, all initial advances may be disbursed on the day 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 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 loan companies will need to enter in 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 those who anticipate utilizing the HECM for Purchase option on all topics covered in this Mortgagee Letter and other HUD requirements and issuances.
Mortgage companies need to ensure the house, when used as collateral for the HECM, meets the following property requirements:
1) It is the borrower’s principal residence;
2) Construction is completed and a occupancy certificate or similar has been issued;
3) Any construction mortgage loan 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, during closing, no other liens against the house exist.