A reverse mortgage purchase enables seniors age 62 or older in state to purchase a new home with HECM loan proceeds. The principal benefit to the senior is the purchase only requires one set of closing costs vs. buying a home and getting a reverse mortgage afterwards, which will incur two complete sets of closing costs. Created by the Housing and Economic Recovery Act of 2008, the program became live on January 1, 2009. Qualified seniors must conform to all HECM requirements, each of the standard guidelines apply in combination with some new rules and regulations.

A few of the basics?

Can buy existing 1 to 4 unit property
House will need to serve as primary residence
Once HECM purchase is completed, no further liens are acceptable (Lender in 1st position, HUD in silent 2nd)
Will need to supply monetary investment at closing from allowed funding source, see below for details
Must live in property within Sixty days of close of escrow
Newly constructed houses needs to have certificate of occupancy

There are several differences between a HECM for purchase and a classic HECM for seniors in state.

The key differences concern the properties types that are eligible, the money needed at close of escrow, the assistance of a real estate broker in the mortgage loan process, the recommendation of a qualified home inspection, and certain settlement fees.

Check out these other pages of information:

North Highlands, Foothill Farms, McClellan Park, Antelope, Sabre City

Permitted Properties

Identical to regular HECM loans

Ineligible Properties
Cooperative units
Manufactured homes constructed before 1976 and without permanent foundation
Bed and breakfast properties, boarding houses

What is the money investment requirement?

At close of escrow, HECM borrowers will need to supply a monetary investment which is applied to satisfy the difference between the HECM principal limit and the sales price for the property, in addition to any HECM loan related expenses which aren’t financed or offset by other allowed FHA funding sources. This means that, the funds from the reverse mortgage and any money from the sale of the old property (or from the borrower’s personal savings) needs to be enough to purchase the new property outright.

The difference between principal limit and sales price for the property in state includes any HECM mortgage loan related fees which aren’t financed or offset by other allowable funding source. Borrowers could provide a larger down payment amount so that they can maintain a percentage of HECM funds for future draws.

What are allowed investment resources?

Homeowner can only make use of their personal funds or capital obtained from the sale of financial assets.
Withdrawals from borrower’s personal savings or pension account are satisfactory.

Mortgage lenders will be required to validate the original source of all the resources before close of escrow. A verification of deposit, along with the most current bank statement, may be used to validate savings and checking accounts. Whether there is a significant increase in an account, or the account was opened up fairly recently, the lending company will have to obtain a legitimate clarification of the source of those funds. Such 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.

What funding sources are ineligible?

Gifts
Loan discount points
Rate buy downs
Closing cost assistance
Building contractors incentives
Seller contributions or homeowner financing
Credit card advances
Secured or non-secured loans from another asset (car, home equity)

Borrowers may not obtain a bridge loan (often known as “gap financing”) or take part in other temporary financing techniques to meet the monetary investment obligation or payment of settlement fees necessary to close the purchase transaction. This limitation is comprised of subordinate liens, personal loan, cash withdrawals from charge cards, seller financing and also any other lending obligations that can’t be satisfied at closing.

What is the Function of the Realtor?

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

Selecting a Property for Purchase & Getting an Home inspection

All seniors are strongly encouraged by HUD to have a home inspection from a licensed professional home inspector (It’s advised but is not mandatory)

Evaluates the physical condition: structure, construction, and mechanical systems
Identifies items that ought to be fixed or replaced before the scheduled close of escrow date
Estimates the remaining practical life of the key 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
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 home

Writing an offer

Must state offer contingent on acceptable inspection conducted by qualified home inspector
Borrower might wish attorney to review – increases expenses but can be worth it
Client can cancel transaction at any time prior to closing however, this could affect earnest money deposit

Closing Costs for a

Standard HECM settlement costs plus:

Recording fees
Transfer taxes
Varies from state-to-state

Other things you ought to know about HECM in California:

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. Consequently, all initial advances may be paid at the time of closing by the settlement agent. However, FHA encourages lenders to get their counsel’s opinion to ensure compliance with Federal or state laws.
Seller incentives aren’t applicable to reverse mortgages.
Existing HECM borrowers who take part in a HECM for Purchase transaction are ineligible for a reduction of the upfront MIP and mortgage lenders will need to enter in the transaction into FHA Connection as a new HECM.
HUD-approved housing counseling agencies which have been authorised to provide reverse mortgage counseling, must counsel people who anticipate making use of the HECM for Purchase option on all topics covered in this Mortgagee Letter and other HUD requirements and issuances.
Mortgage lenders are required to make sure the property, when used as collateral for the HECM, satisfies the following property requirements:

1) It is the borrower’s primary residence;

2) Construction is completed and a C of O or similar was issued;

3) Any construction mortgage loan financing for the property, 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 property exist.