A reverse mortgage purchase makes it possible for seniors age 62 or older in state to purchase a new house with HECM loan proceeds. The main benefit to the senior is the transaction only requires one set of settlement costs vs. purchasing a house and obtaining a reverse mortgage afterwards, which will incur two complete sets of settlement costs. Created by the Housing and Economic Recovery Act of 2008, the program became live on January 1, 2009. Eligible seniors must comply with all HECM standards, all the basic guidelines apply in addition to a few new guidelines.
A few of the fundamentals?
Can buy existing 1 to 4 unit properties
House will need to serve as principal residence
Once HECM purchase is completed, no additional liens are allowed (Loan provider in 1st position, HUD in silent 2nd)
Will need to provide financial investment at closing from allowed funding source, see below for details
Need to live in house within 60 days of close of escrow
Newly constructed houses require certificate of occupancy
There are some differences between a HECM for purchase and a classic HECM for seniors in state.
The key differences concern the properties types that are qualified, the funds needed at close of escrow, the involvement of a realtor in the mortgage process, the recommendations of a qualified house inspection, and certain settlement costs.
Check out these other pages of information:
Antelope, Roseville, Orangevale, Sabre City, Foothill Farms
Eligible Properties
Same as standard HECM mortgages
Ineligible Properties
Cooperative units
Manufactured housing constructed prior to 1976 and without permanent foundation
Bed and breakfast properties, boarding houses
What is the monetary investment requirement?
At close of escrow, HECM borrowers will have to supply a financial investment which will be applied to satisfy the difference between the HECM principal limit and the purchase price for the house, along with any HECM loan related expenses that are not financed or offset by other allowable FHA funding sources. This means that, the proceeds from the reverse mortgage and any funds from the sale of the old house (or from the borrower’s savings account) has to be enough to purchase the new house outright.
The difference between principal limit and sales price for the house in state includes any HECM mortgage related costs that are not financed or offset by other permitted funding source. Borrowers could provide a larger down payment amount to be able to keep a percentage of HECM proceeds for future draws.
What are allowed financing resources?
Consumer may make use of their own funds or money obtained from selling property and assets.
Withdrawals from borrower’s savings or retirement account are generally acceptable.
Loan companies are going to be required to confirm the original source of all the funds in advance of close of escrow. A verification of deposit, along with the most current bank statement, may be used to confirm savings and checking accounts. When there’s a substantial increase in an account, or the account was opened up fairly recently, the lending company must get a valid clarification of the source of those funds. This sort of paperwork has to be provided in the FHA case binder. Failure to produce the mandatory paperwork could lead to a notice of rejection and postponement of endorsement.
What funding resources are ineligible?
Gifts
Loan discount points
Interest rate buy downs
Settlement cost assistance
Builders incentives
Seller contributions or homeowner financing
Charge card advances
Secured or non-secured loans from another asset (car, home equity)
Borrowers will not get a bridge loan (also known as “gap financing”) or take part in other interim financing methods to satisfy the financial investment obligation or payment of settlement costs needed to finalize the purchase transaction. This restriction includes subordinate liens, unsecured loans, cash withdrawals from charge cards, seller financing and any other lending obligations that can’t be satisfied at closing.
What is the Role of the Real Estate Agent?
Seniors in state must consider a written agreement – you need to include contingencies for the sale of the senior’s previous house, the house inspection, etc.
Deciding on a House for Purchase & Obtaining an Home inspection
All seniors are strongly encouraged by HUD to get a home inspection from a licensed certified home inspector (It is advised but is not required)
Examines the soundness: structure, construction, and mechanical systems
Determines items that ought to be repaired or replaced before the scheduled close of escrow date
Estimates the remaining practical life of the main systems, equipment, structure, and finishes
Buyers could be at the inspection to ask questions regarding the condition and maintenance
Required Repairs
Health and safety or architectural integrity issues
Needs to be completed 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 done by qualified home inspector
Borrower may want attorney to review – raises expenses but can be worth it
Client can cancel transaction anytime before closing however, this could affect earnest money deposit
Closing Costs for a
Standard HECM settlement fees plus:
Recording fees
Transfer taxes
Varies from state-to-state
Other things you ought to know about reverse mortgage lender:
There’s no 3 day right of rescission unlike traditional HECM. The 3-day right of rescission period is not applicable to HECM for Purchase transactions. Therefore, all initial advances could be disbursed at the time of closing by the escrow officer. However, FHA encourages financial institutions to seek their counsel’s opinion to ensure compliance with Federal or state laws.
Seller incentives aren’t applicable to reverse mortgages.
Existing HECM borrowers who participate in a HECM for Purchase transaction are ineligible for a reduction of the upfront MIP and lenders will have to enter the transaction into FHA Connection as a new HECM.
HUD-approved housing counseling agencies which have been accredited to provide reverse mortgage counseling, must counsel people who anticipate utilizing the HECM for Purchase option on all topics covered in this Mortgagee Letter and other HUD requirements and issuances.
Loan companies need to ensure the house, when used as collateral for the HECM, satisfies the following property requirements:
1) It’s the borrower’s principal residence;
2) Construction is finished and a C of O or something similar has been issued;
3) Any construction mortgage 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, at the time of closing, no liens against the house exist.