A reverse mortgage purchase enables seniors age 62 or older in state to buy a new property with HECM loan proceeds. The principal benefit to the senior is the fact that transaction only involves one set of settlement costs vs. buying a property and obtaining a reverse mortgage thereafter, which will have two complete sets of settlement 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, each of the basic regulations apply along with a few new guidelines.

What are the fundamentals?

Can buy existing 1 to 4 unit property
House will need to serve as principal residence
Once HECM purchase is completed, no further liens are allowed (Loan provider in 1st position, HUD in silent 2nd)
Must supply financial investment at closing from allowed funding source, see below for details
Will need to reside in house within 60 days of close of escrow
Newly constructed homes needs to have certificate of occupancy

There are a few differences between a HECM for purchase and a traditional HECM for seniors in state.

The key differences concern the properties types which are eligible, the cash required at close of escrow, the assistance of a real estate agent in the mortgage process, the recommendations of a qualified professional property inspection, and certain closing costs.

Check out these other pages of information:

Fair Oaks, Foothill Farms, Gold River, Walerga, McClellan Park

Eligible Properties

Identical to traditional HECM loans

Ineligible Properties
Cooperative units
Manufactured homes built before 1976 and lacking permanent foundation
Bed and breakfast properties, boarding houses

What’s the monetary investment requirement?

At close of escrow, HECM borrowers will have to provide a financial investment which is to be applied to satisfy the difference between the HECM principal limit and the sales price for the house, in addition to any HECM loan associated expenses that are not financed or offset by other permitted FHA funding sources. Basically, the funds from the reverse mortgage and any funds from the sale of the old house (or from the borrower’s savings) needs to be enough to purchase the new house outright.

The main 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 allowable funding source. Homeowners can provide a larger investment amount so that they can keep a percentage of HECM funds for future draws.

What are allowed funding resources?

Consumer may only use their own capital or cash obtained from selling properties and assets.
Withdrawals from borrower’s savings or pension account will be satisfactory.

Mortgage companies will be required to validate the source of all the resources prior to close of escrow. A verification of deposit, along with the latest bank statement, may be used to validate savings and checking accounts. Whether there is a considerable increase in an account, or the account was opened up recently, the lender will need to get a valid clarification of the source of those funds. Such documents needs to be provided in the FHA case binder. Failing to produce 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
Closing cost assistance
Home builder incentives
Home owner contributions or seller financing
Credit card advances
Secured or non-secured loans from another asset (car, home equity)

Homeowners will not get a bridge loan (also called “gap financing”) or engage in other temporary financing techniques to satisfy the financial investment requirement or payment of closing costs required to close the purchase transaction. This limitation includes subordinate liens, personal loans, cash withdrawals from credit cards, seller financing and any other lending obligations that cannot be satisfied at closing.

What’s the Function of the Realtor?

Seniors in state must consider a written agreement – it is best to include contingencies for the sale of the senior’s previous property, the property inspection, etc.

Deciding on a Property for Purchase & Getting an Inspection

All seniors are strongly encouraged by HUD to get a home inspection from a licensed qualified professional home inspector (This is recommended however it is not mandatory)

Evaluates the physical condition: structure, construction, and mechanical systems
Specifies items that need to be fixed or replaced prior to the scheduled close of escrow date
Estimates the remaining useful life span of the main systems, equipment, structure, and finishes
Buyers can be at the inspection to ask questions regarding the condition and maintenance

Required Repairs

Health and safety or architectural integrity issues
Need to be completed prior to closing by seller
Include in purchase agreement
Buyer cannot put any cash into repairs before they own the property

Writing an offer

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

Settlement Costs for a

Standard Home Equity Conversion Mortgage settlement costs plus:

Recording fees
Transfer taxes
Varies from state-to-state

Other things you should know about Home Equity Conversion Mortgage in California:

There’s no three day right of rescission unlike traditional HECM. The three-day right of rescission period isn’t applicable to HECM for Purchase transactions. Consequently, all initial advances could be paid on the day 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 are not 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 mortgage companies will have to enter in the transaction into FHA Connection as a new HECM.
HUD-approved housing counseling agencies which have been authorized to provide reverse mortgage counseling, must counsel those that anticipate making use of the HECM for Purchase option on all topics covered in this Mortgagee Letter and other HUD requirements and issuances.
Mortgage companies must ensure the house, 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 similar was 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, during closing, no other liens against the house exist.