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 fact that purchase only involves one set of closing costs vs. purchasing a house and getting a reverse mortgage thereafter, which will 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. Qualified seniors must conform to all HECM standards, all of the standard rules apply in addition to a few new regulations.
What are the basics?
Can purchase existing 1 to 4 unit properties
Property will need to serve as primary residence
Once HECM purchase is completed, no further liens are permitted (Loan provider in 1st position, HUD in silent 2nd)
Will have to supply financial investment at closing from permitted funding source, see below for details
Will have to live in property within 60 days of closing
Newly constructed 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 major distinctions concern the properties types that are allowed, the money required at closing, the assistance of a realtor in the home loan process, the recommendations of a professional house inspection, and specific settlement fees.
Check out these other pages of information:
Walerga, Foothill Farms, McClellan Park, Sabre City, Antelope
Eligible Properties
Same as conventional HECM loans
Ineligible Properties
Cooperative units
Manufactured housing constructed prior to 1976 and lacking permanent foundation
Bed and breakfast properties, boarding houses
What is the money investment requirement?
At closing, HECM borrowers will need to supply a financial investment which is applied to fulfill the difference between the HECM principal limit and the sales price for the property, in addition to any HECM loan related fees that aren’t financed or offset by other permitted FHA funding sources. Basically, the funds from the reverse mortgage as well as any funds from the sale of the old property (or from the consumer’s savings) will have to be adequate to purchase the new property outright.
A real difference between principal limit and sales price for the property in state includes any HECM home loan related fees that aren’t financed or offset by other permitted funding source. Homeowners could provide a larger investment amount in order to keep a portion of HECM funds for future draws.
What are permitted funding options?
Consumer may only use their personal money or cash obtained from the sale of assets.
Withdrawals from consumer’s savings or retirement account are usually acceptable.
Lenders are going to be required to confirm the origin of all the funds before closing. A verification of deposit, in addition to the latest bank statement, could be used to confirm savings and checking accounts. If there is a significant increase in an account, or the account was opened up fairly recently, the mortgage lender must obtain a valid explanation of the source of those funds. Such documents will have to be provided in the FHA case binder. Failure to supply the specified documentation may result in a notice of rejection and postponement of endorsement.
Which funding sources are ineligible?
Gifts
Loan discount points
Interest rate buy downs
Settlement cost assistance
Builder incentives
Seller contributions or home owner financing
Charge card advances
Secured or non-secured loans from another asset (car, home equity)
Homeowners will not obtain a bridge loan (also known as “gap financing”) or engage in other interim financing techniques to meet the financial investment requirement or payment of settlement fees necessary to close the purchase transaction. This restriction includes subordinate liens, personal loans, cash withdrawals from charge cards, seller financing and any other lending obligations that can’t be satisfied at closing.
What is the Function of the Real Estate Agent?
Seniors in state should consider a written contract – make sure you include contingencies for the sale of the senior’s previous house, the house inspection, etc.
Selecting a Property for Purchase & Obtaining an Inspection
All seniors are strongly encouraged by HUD to get a home inspection from a licensed certified home inspector (This is suggested but not required)
Evaluates the soundness: structure, construction, and mechanical systems
Determines issues that need to be repaired or replaced before the scheduled closing date
Estimates the remaining practical life of the key systems, equipment, structure, and finishes
Buyers could 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 completed 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 contingent on satisfactory inspection done by qualified home inspector
Borrower may want attorney to review – raises fees but may be worth it
Client can cancel transaction anytime prior to closing but this could affect earnest money deposit
Settlement Fees for a
Standard HECM settlement fees plus:
Recording fees
Transfer taxes
Varies from state-to-state
Other things you need to know about FHA reverse mortgage in California:
There’s no 3 day right of rescission unlike traditional HECM. The 3-day right of rescission period isn’t applicable to HECM for Purchase transactions. Consequently, all initial advances could be paid at the time of closing by the escrow officer. However, FHA encourages loan companies to get their counsel’s opinion to assure 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 reduction of the upfront MIP and mortgage companies will need to enter in the transaction into FHA Connection as a new HECM.
HUD-approved housing counseling agencies that have been accredited to provide reverse mortgage counseling, must counsel people who anticipate using the HECM for Purchase option on all topics covered in this Mortgagee Letter and other HUD requirements and issuances.
Lenders must ensure the property, when utilized as collateral for the HECM, satisfies the following property requirements:
1) It’s the borrower’s primary residence;
2) Construction is finished and a certificate of occupancy or its equivalent was issued;
3) Any construction home 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 liens against the property exist.