A reverse mortgage purchase allows seniors age 62 or older in state to purchase a new house with HECM loan proceeds. The principal benefit to the senior is the transaction only requires one set of closing costs vs. purchasing a house and obtaining a reverse mortgage thereafter, which would incur 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 comply with all HECM requirements, all of the standard rules apply together with a few new regulations and rules.

A few of the basics?

Can purchase existing 1 to 4 unit property
Property must serve as principal residence
Once HECM purchase is done, no additional liens are acceptable (Lender in 1st position, HUD in silent 2nd)
Must provide monetary investment at closing from permitted funding source, see below for requirements
Must occupy house within 60 days of close of escrow
Newly built properties must have certificate of occupancy

There are a few variations between a HECM for purchase and a conventional HECM for seniors in state.

The major differences concern the properties types which are allowed, the cash needed at close of escrow, the assistance of a real estate broker in the mortgage process, the recommendations of a qualified house inspection, and certain closing costs.

Check out these other pages of information:

Nimbus, Fair Oaks, Alder Creek, Orangevale, Natoma

Permitted Properties

Identical to traditional HECM loans

Ineligible Properties
Cooperative units
Manufactured housing constructed prior to 1976 and lacking permanent foundation
Bed and breakfast properties, boarding houses

What’s the monetary investment requirement?

At close of escrow, HECM borrowers will need to produce a monetary investment that is to be applied to fulfill the difference between the HECM principal limit and the purchase price for the house, in addition to any HECM loan associated fees which are not financed or offset by other permitted FHA funding sources. In other words, the funds from the reverse mortgage as well as any cash from the sale of the old house (or from the consumer’s savings) has to be sufficient to buy the new house outright.

The main difference between principal limit and sales price for the house in state includes any HECM mortgage related costs which are not financed or offset by other allowable funding source. Homeowners can provide a larger down payment amount as a way to retain a portion of HECM funds for future draws.

What are permitted financing resources?

Homeowner may make use of their own funds or capital obtained from selling property and assets.
Withdrawals from consumer’s savings or retirement account are acceptable.

Loan providers are going to be required to validate the origin of all the resources in advance of close of escrow. A verification of deposit, together with the most up-to-date bank statement, could be used to validate savings and checking accounts. When there’s a considerable increase in an account, or the account was opened up recently, the lending company will have to get a credible justification of the source of those funds. This kind of documents has to be provided in the FHA case binder. Failing to provide the necessary documentation could lead to a notice of denial and postponement of endorsement.

Which funding resources are ineligible?

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

Homeowners may not get a bridge loan (also called “gap financing”) or engage in other temporary financing methods to meet the monetary investment obligation or payment of closing costs required to finalize the purchase transaction. This limitation may include subordinate liens, personal loan, cash withdrawals from charge cards, seller financing along with other lending commitments that can’t be satisfied at closing.

What’s the Function of the Real Estate Agent?

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

Deciding on a House for Purchase & Getting an Inspection

All seniors are strongly encouraged by HUD to have a home inspection from a licensed certified home inspector (This is suggested however it is not mandatory)

Evaluates the physical condition: structure, construction, and mechanical systems
Identifies items which need to be fixed or replaced before the scheduled close of escrow date
Estimates the remaining useful life of the key systems, equipment, structure, and finishes
Buyers should be at the inspection to ask questions on the condition and maintenance

Required Repairs

Health and safety or structural integrity issues
Will have to be finished prior to closing by seller
Include in purchase agreement
Buyer can’t put any cash into repairs before they own the house

Writing an offer

Must state offer contingent on satisfactory inspection performed by qualified inspector
Borrower might wish attorney to review – will increase costs but will be worth it
Client may cancel transaction any time before closing but this may affect earnest money deposit

Closing Costs for a

Standard HECM settlement costs plus:

Recording fees
Transfer taxes
Varies from state-to-state

Other things you should consider about reverse mortgage:

There is no three day right of rescission contrary to traditional HECM. The three-day right of rescission period is not applicable to HECM for Purchase transactions. As a result, all initial advances can be paid at the time of closing by the escrow officer. However, FHA encourages financial institutions to seek their counsel’s opinion to assure compliance with Federal or state laws.
Seller concessions are not applicable to reverse mortgages.
Existing HECM borrowers who participate in a HECM for Purchase transaction are ineligible for a decrease in the upfront MIP and financial institutions will need to 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 individuals who anticipate using the HECM for Purchase option on all topics covered in this Mortgagee Letter and other HUD requirements and issuances.
Loan providers need to be sure that the house, when utilized as collateral for the HECM, satisfies the following property requirements:

1) It is the borrower’s principal residence;

2) Construction is complete and a CO or similar was issued;

3) Any construction mortgage 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, during closing, no liens against the house exist.