A reverse mortgage purchase enables seniors age 62 or older in state to buy a new property with HECM loan proceeds. The main benefit to the senior is the fact that purchase only involves one set of closing costs vs. purchasing a property and getting a reverse mortgage after, which would have two complete sets of closing costs. Developed by the Housing and Economic Recovery Act of 2008, the program became live on January 1, 2009. Qualified seniors must abide by all HECM requirements, each of the standard guidelines apply in combination with some new rules and regulations.
A few of the basics?
Can purchase existing 1 to 4 unit properties
Property must serve as principal residence
Once HECM purchase is completed, no additional liens are acceptable (Financial institution in 1st position, HUD in silent 2nd)
Must provide monetary investment at closing from allowed funding source, see below for details
Will need to live in house within Sixty days of closing
Newly constructed 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 key differences concern the properties types that are qualified, the funds needed at closing, the assistance of a real estate broker in the mortgage loan process, the recommendation of a certified property inspection, and certain settlement costs.
Check out these other pages of information:
Sabre City, Foothill Farms, Citrus Heights, North Highlands, Walerga
Permitted Properties
Same as conventional HECM mortgages
Ineligible Properties
Cooperative units
Manufactured homes built before 1976 and without permanent foundation
Bed and breakfast properties, boarding houses
What is the money investment requirement?
At closing, HECM borrowers will have to produce a monetary investment which is to be applied to fulfill the difference between the HECM principal limit and the sales price for the house, along with any HECM loan associated fees which aren’t financed or offset by other permitted FHA funding sources. Basically, the funds from the reverse mortgage and any cash from the sale of the old house (or from the borrower’s personal savings) has to be enough to buy the new house outright.
The difference between principal limit and sales price for the house in state includes any HECM mortgage loan related fees which aren’t financed or offset by other allowable funding source. Homeowners can provide a larger down payment amount to be able to keep a portion of HECM funds for future draws.
What are allowed investment options?
Borrower can only use their personal money or funds obtained from the sale of financial assets.
Withdrawals from borrower’s savings or pension account are usually acceptable.
Lenders are going to be required to verify the original source of all the resources in advance of closing. A verification of deposit, in addition to the most up-to-date bank statement, may be used to verify savings and checking accounts. When there is a large increase in an account, or the account was opened up recently, the lending company must get a legitimate justification of the source of those funds. This kind of documents has to be presented in the FHA case binder. Failing to produce the required documentation could lead to a notice of rejection and postponement of endorsement.
Which funding resources are ineligible?
Gifts
Loan discount points
Rate buy downs
Closing cost assistance
Home builder incentives
Home owner contributions or homeowner financing
Charge card advances
Secured or non-secured loans from another asset (car, home equity)
Homeowners will not get a bridge loan (often known as “gap financing”) or take part in other interim financing strategies to meet the monetary investment obligation or payment of settlement costs necessary to finalize the purchase transaction. This limitation is comprised of subordinate liens, unsecured loans, cash withdrawals from charge cards, seller financing and any other lending commitments that can not be satisfied at closing.
What is the Function of the Real Estate Broker?
Seniors in state must consider a written agreement – you should include contingencies for the sale of the senior’s previous property, the home inspection, etc.
Selecting a Property for Purchase & Obtaining an Inspection
All seniors are strongly encouraged by HUD to have a home inspection from a licensed qualified home inspector (This is suggested but is not mandatory)
Assesses the soundness: structure, construction, and mechanical systems
Determines items which ought to be fixed or replaced before the scheduled closing date
Estimates the remaining useful life span of the major 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 can’t put any cash into repairs before they own the property
Writing an offer
Must state offer contingent on satisfactory inspection done by qualified home inspector
Borrower may wish attorney to review – raises fees but may be worth it
Client may cancel transaction anytime before closing but this could affect earnest money deposit
Settlement Fees for a
Standard Reverse Loan costs plus:
Recording fees
Transfer taxes
Varies from state-to-state
Other things you should know about reverse mortgage in California:
There’s no 3 day right of rescission unlike traditional HECM. The 3-day right of rescission period isn’t applicable to HECM for Purchase transactions. Consequently, all initial advances can be disbursed on the day of closing by the escrow company. 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 get involved in a HECM for Purchase transaction are ineligible for a decrease in the upfront MIP and financial institutions will have to enter the transaction into FHA Connection as a new HECM.
HUD-approved housing counseling agencies that have been authorized 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.
Lenders will have to make sure the house, when used as collateral for the HECM, meets the following property requirements:
1) It is the borrower’s principal residence;
2) Construction is completed and a occupancy certificate or its equivalent has been issued;
3) Any construction mortgage loan 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 other liens against the house exist.