A reverse mortgage purchase enables seniors age 62 or older in state to purchase a new property with HECM loan proceeds. The key benefit to the senior is the fact that transaction only requires one set of settlement costs vs. buying a property and obtaining a reverse mortgage after, which would incur two complete sets of settlement costs. Created by the Housing and Economic Recovery Act of 2008, this program became live on January 1, 2009. Eligible seniors must adhere to all HECM requirements, each of the basic regulations apply in combination with some new guidelines.
What are the fundamentals?
Can buy existing 1 to 4 unit properties
Home must serve as primary residence
Once HECM purchase is finished, no additional liens are allowed (Loan provider in 1st position, HUD in silent 2nd)
Must supply financial investment at closing from allowable funding source, see below for specifics
Need to live in home within Sixty days of closing
Newly built houses needs to have certificate of occupancy
There are a few variations between a HECM for purchase and a classic HECM for seniors in state.
The major differences concern the properties types that are eligible, the funds required at closing, the assistance of a real estate agent in the loan process, the recommendation of a qualified property inspection, and certain settlement fees.
Check out these other pages of information:
Folsom Junction, Natoma, Orangevale, Alder Creek, Nimbus
Permitted Properties
Same as standard HECM mortgages
Ineligible Properties
Cooperative units
Manufactured homes constructed prior to 1976 and without permanent foundation
Bed and breakfast properties, boarding houses
What is the money investment requirement?
At closing, HECM borrowers will need to provide a financial investment which will be applied to satisfy the difference between the HECM principal limit and the purchase price for the home, as well as any HECM loan connected expenses which are not financed or offset by other allowed FHA funding sources. Basically, the funds from the reverse mortgage and any money from the sale of the old home (or from the homeowner’s savings) will have to be sufficient to purchase the new home outright.
The main difference between principal limit and sales price for the home in state includes any HECM loan related fees which are not financed or offset by other permitted funding source. Borrowers can provide a larger down payment amount as a way to retain a portion of HECM funds for future draws.
What are allowable financing sources?
Homeowner may only make use of their personal funds or money obtained from the sale of assets.
Withdrawals from homeowner’s personal savings or pension account are generally satisfactory.
Lenders are going to be required to validate the origin of all the money before closing. A verification of deposit, together with the most recent bank statement, could be used to validate savings and checking accounts. When there is a large increase in an account, or the account was opened up fairly recently, the lending company will have to obtain a legitimate explanation of the source of those funds. This sort of paperwork will have to be made available in the FHA case binder. Failing to produce the specified documentation may lead to a notice of denial and delay of endorsement.
Which funding sources are ineligible?
Gifts
Loan discount points
Interest rate buy downs
Closing cost assistance
Builders incentives
Home owner contributions or seller financing
Charge card advances
Secured or non-secured loans from another asset (car, home equity)
Borrowers may not obtain a bridge loan (also referred to as “gap financing”) or engage in other interim financing strategies to meet the financial investment requirement or payment of settlement fees required to complete the purchase transaction. This limitation may include subordinate liens, personal loans, cash withdrawals from credit cards, seller financing and also any other lending commitments that cannot be satisfied at closing.
What is the Role of the Real Estate Agent?
Seniors in state should consider a written agreement – you should include contingencies for the sale of the senior’s previous property, the home inspection, etc.
Choosing a Property for Purchase & Getting an Home inspection
All seniors are strongly encouraged by HUD to have a home inspection from a licensed skilled professional home inspector (This is recommended however it is not required)
Evaluates the soundness: structure, construction, and mechanical systems
Specifies items that need to be fixed or replaced before the scheduled closing date
Estimates the remaining practical 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
Must be finished prior to closing by seller
Include in purchase agreement
Buyer can’t put any cash into repairs before they own the property
Writing an offer
Must state offer contingent on satisfactory inspection performed by qualified inspector
Borrower may wish attorney to review – increases fees but may be worth it
Client can cancel transaction anytime before closing however this could affect earnest money deposit
Settlement Fees for a
Standard Home Equity Conversion Mortgage settlement costs plus:
Recording fees
Transfer taxes
Varies from state-to-state
Other things you ought to know about reverse home loan:
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. As a result, all initial advances can be paid at the time of closing by the settlement agent. However, FHA encourages financial institutions to seek their counsel’s opinion to assure compliance with Federal or state laws.
Seller incentives aren’t applicable to reverse mortgages.
Existing HECM borrowers who get involved in a HECM for Purchase transaction are ineligible for a decrease in the upfront MIP and loan companies will need to enter in 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 those that anticipate using the HECM for Purchase option on all topics covered in this Mortgagee Letter and other HUD requirements and issuances.
Lenders need to ensure that the home, when used as collateral for the HECM, meets the following property requirements:
1) It is the borrower’s primary residence;
2) Construction is finished and a CO or something similar was issued;
3) Any construction 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.