A reverse mortgage purchase allows seniors age 62 or older in state to buy a new house with HECM loan proceeds. The main benefit to the senior is the fact that purchase only involves one set of closing costs vs. buying a house and getting a reverse mortgage afterwards, which would incur two complete sets of closing costs. Created by the Housing and Economic Recovery Act of 2008, the program became live on January 1, 2009. Qualified seniors must adhere to all HECM requirements, all of the standard rules apply together with some new rules and regulations.
A few of the fundamentals?
Can purchase existing 1 to 4 unit property
Home will need to serve as principal residence
Once HECM purchase is done, no further liens are permitted (Financial institution in 1st position, HUD in silent 2nd)
Must supply financial investment at closing from permitted funding source, see below for details
Will need to live in home within Sixty days of close of escrow
Newly constructed houses must have certificate of occupancy
There are several variations between a HECM for purchase and a traditional HECM for seniors in state.
The major differences concern the properties types which are permitted, the funds required at close of escrow, the involvement of a real estate professional in the mortgage loan process, the recommendations of a qualified professional house inspection, and specific settlement fees.
Check out these other pages of information:
Nimbus, Natoma, Gold River, Folsom Junction, Folsom
Eligible Properties
Same as traditional HECM loans
Ineligible Properties
Cooperative units
Manufactured housing 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 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 home, as well as any HECM loan connected expenses which aren’t financed or offset by other permitted FHA funding sources. This means that, the proceeds from the reverse mortgage and any cash from the sale of the old home (or from the borrower’s savings account) will have to be enough to purchase the new home outright.
The main difference between principal limit and sales price for the home in state includes any HECM mortgage loan related fees which aren’t financed or offset by other permitted funding source. Homeowners could provide a larger investment amount to be able to retain a percentage of HECM proceeds for future draws.
What are permitted investment sources?
Borrower can only make use of their personal capital or money obtained from selling assets.
Withdrawals from borrower’s personal savings or retirement account are satisfactory.
Loan providers will be required to confirm the original source of all money in advance of close of escrow. A verification of deposit, in addition to the latest bank statement, could be used to confirm savings and checking accounts. If there is a considerable increase in an account, or the account was opened up recently, the mortgage lender must get a credible justification of the source of those funds. This sort of documentation will have to be supplied in the FHA case binder. Failing to provide the necessary documents may lead to a notice of rejection and delay of endorsement.
What funding resources are ineligible?
Gifts
Loan discount points
Rate buy downs
Settlement cost assistance
Home builder incentives
Seller contributions or property owner financing
Charge card advances
Secured or non-secured loans from another asset (car, home equity)
Homeowners will not get a bridge loan (often known as “gap financing”) or take part in other temporary financing strategies to meet the financial investment requirement or payment of settlement fees necessary to complete the purchase transaction. This limitation is comprised of subordinate liens, personal loan, cash withdrawals from credit cards, seller financing as well as any other lending obligations that can’t be satisfied at closing.
What is the Function of the Real Estate Agent?
Seniors in state must consider a written agreement – you should include contingencies for the sale of the senior’s previous house, the house 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 (It’s suggested but not mandatory)
Evaluates the soundness: structure, construction, and mechanical systems
Specifies items that should be repaired 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 on the condition and maintenance
Required Repairs
Health and safety or architectural integrity issues
Must be finished prior to closing by seller
Include in purchase agreement
Buyer can not put any cash into repairs before they own the house
Writing an offer
Must state offer contingent on acceptable inspection done by qualified home inspector
Borrower may wish attorney to review – raises costs but will be worth it
Client can cancel transaction anytime before closing but this could affect earnest money deposit
Settlement Fees for a
Standard Reverse Home Loan settlement fees plus:
Recording fees
Transfer taxes
Varies from state-to-state
Other things you need to understand about reverse mortgage lenders:
There is no three day right of rescission unlike traditional HECM. The three-day right of rescission period is not applicable to HECM for Purchase transactions. Consequently, all initial advances can be paid on the day of closing by the settlement agent. However, FHA encourages lenders to seek 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 companies will have to enter the transaction into FHA Connection as a new HECM.
HUD-approved housing counseling agencies which have been approved to provide reverse mortgage counseling, must counsel those who anticipate using the HECM for Purchase option on all topics covered in this Mortgagee Letter and other HUD requirements and issuances.
Loan providers must make sure the home, when utilized as collateral for the HECM, meets the following property requirements:
1) It’s the borrower’s principal residence;
2) Construction is complete and a occupancy certification or its equivalent was issued;
3) Any construction mortgage loan financing for the home, 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 home exist.