A reverse mortgage purchase allows seniors age 62 or older in state to buy a new property with HECM loan proceeds. The key benefit to the senior is that the purchase only requires one set of settlement costs vs. purchasing a property and obtaining a reverse mortgage afterwards, which will have two complete sets of settlement costs. Developed by the Housing and Economic Recovery Act of 2008, the program became live on January 1, 2009. Eligible seniors must comply with all HECM requirements, all of the basic rules apply along with a few new rules and regulations.
A few of the fundamentals?
Can buy existing 1 to 4 unit property
Home must serve as primary residence
Once HECM purchase is done, no additional liens are allowed (Financial institution in 1st position, HUD in silent 2nd)
Will need to provide monetary investment at closing from allowed funding source, see below for details
Will have to occupy home within Sixty days of close of escrow
Newly constructed houses require certificate of occupancy
There are a few differences between a HECM for purchase and a standard HECM for seniors in state.
The main distinctions concern the properties types that are qualified, the money required at close of escrow, the involvement of a real estate professional in the mortgage process, the recommendations of a certified property inspection, and specific closing costs.
Check out these other pages of information:
Loomis, Roseville, Granite Bay, Hidden Valley, Whitney
Permitted Properties
Same as regular HECM loans
Ineligible Properties
Cooperative units
Manufactured housing built 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 must supply a monetary investment which is applied to satisfy the difference between the HECM principal limit and the purchase price for the home, as well as any HECM loan connected fees which are not financed or offset by other allowed FHA funding sources. In other words, the proceeds from the reverse mortgage and any money from the sale of the old home (or from the borrower’s savings) needs to be enough to purchase the new home outright.
The difference between principal limit and sales price for the home in state includes any HECM mortgage related costs which are not financed or offset by other allowable funding source. Borrowers could provide a larger investment amount in order to retain a percentage of HECM proceeds for future draws.
What are allowed investment sources?
Homeowner may only use their own capital or capital obtained from selling property and assets.
Withdrawals from borrower’s personal savings or retirement account will be satisfactory.
Lenders are going to be required to confirm the origin of all funds prior to close of escrow. A verification of deposit, in addition to the latest bank statement, may be used to confirm savings and checking accounts. Whether there is a large increase in an account, or the account was opened up recently, the mortgage lender will have to obtain a legitimate clarification of the source of those funds. This sort of documentation needs to be supplied in the FHA case binder. Failure to produce the specified documents could lead to a notice of rejection and postponement of endorsement.
Which funding sources are ineligible?
Gifts
Loan discount points
Interest rate buy downs
Closing cost assistance
Building contractors incentives
Home owner contributions or homeowner financing
Charge card advances
Secured or non-secured loans from another asset (car, home equity)
Borrowers may not obtain a bridge loan (also called “gap financing”) or engage in other temporary financing techniques to fulfill the monetary investment requirement or payment of closing costs necessary to finalize the purchase transaction. This limitation encompasses subordinate liens, personal loan, cash withdrawals from charge cards, seller financing and also any other lending commitments 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 property, the property inspection, etc.
Choosing a Home for Purchase & Obtaining an Home inspection
All seniors are strongly encouraged by HUD to get a home inspection from a licensed qualified home inspector (It is suggested but is not required)
Evaluates the soundness: structure, construction, and mechanical systems
Describes items which should 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 should be at the inspection to ask questions regarding 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 can not put any money into repairs before they own the property
Writing an offer
Must state offer contingent on sufficient inspection conducted by qualified inspector
Borrower might wish attorney to review – raises expenses but will be worth it
Client can cancel transaction at any time prior to closing however, this may affect earnest money deposit
Settlement Fees for a
Standard Reverse Mortgage 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 is not applicable to HECM for Purchase transactions. Therefore, all initial advances could be disbursed at the time of closing by the settlement agent. However, FHA encourages loan companies 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 engage in a HECM for Purchase transaction are ineligible for a decrease in the upfront MIP and mortgage lenders must enter 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 individuals who anticipate making use of the HECM for Purchase option on all topics covered in this Mortgagee Letter and other HUD requirements and issuances.
Lenders will have to make sure the home, when utilized as collateral for the HECM, meets the following property requirements:
1) It’s the borrower’s primary residence;
2) Construction is complete and a occupancy certification or similar has been issued;
3) Any construction mortgage financing for the home, 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 other liens against the home exist.