A reverse mortgage purchase enables seniors age 62 or older in state to buy a new house with HECM loan proceeds. The key benefit to the senior is that the transaction only requires one set of closing costs vs. purchasing a house and getting a reverse mortgage afterwards, which will incur two complete sets of closing costs. Developed by the Housing and Economic Recovery Act of 2008, this program became live on January 1, 2009. Qualified seniors must abide by all HECM requirements, each of the standard guidelines apply along with a few new regulations and rules.

A few of the basics?

Can purchase existing 1 to 4 unit property
Home must serve as principal residence
Once HECM purchase is done, no additional liens are allowed (Loan provider in 1st position, HUD in silent 2nd)
Will have to supply monetary investment at closing from allowable funding source, see below for requirements
Need to reside in house within 60 days of close of escrow
Newly built homes need to have certificate of occupancy

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

The main differences concern the properties types which are eligible, the money needed at close of escrow, the involvement of a realtor in the mortgage loan process, the recommendation of a professional house inspection, and specific closing costs.

Check out these other pages of information:

Folsom Junction, Folsom, Alder Creek, Nimbus, Orangevale

Eligible Properties

Same as regular HECM mortgages

Ineligible Properties
Cooperative units
Manufactured housing constructed prior to 1976 and lacking permanent foundation
Bed and breakfast properties, boarding houses

What is the monetary investment requirement?

At close of escrow, HECM borrowers will need to supply a monetary investment which will be applied to satisfy the difference between the HECM principal limit and the sales price for the house, as well as any HECM loan connected expenses that are not financed or offset by other allowed FHA funding sources. Basically, the funds from the reverse mortgage and any cash from the sale of the old house (or from the homeowner’s personal savings) will have to be sufficient to purchase the new house outright.

The primary difference between principal limit and sales price for the house in state includes any HECM mortgage loan related costs that are not financed or offset by other permitted funding source. Homeowners could provide a larger investment amount in order to maintain a portion of HECM funds for future draws.

What are allowable investment resources?

Borrower can only make use of their own funds or funds obtained from selling assets.
Withdrawals from homeowner’s savings or pension account are acceptable.

Financial institutions will be required to validate the origin of all the funds in advance of close of escrow. A verification of deposit, together with the latest 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 fairly recently, the financial institution must obtain a legitimate clarification of the source of those funds. This sort of documents will have to be supplied in the FHA case binder. Failure to provide the required documents may lead to a notice of rejection and delay of endorsement.

What funding sources are ineligible?

Gifts
Loan discount points
Rate buy downs
Closing cost assistance
Home builder incentives
Seller contributions or seller financing
Charge card advances
Secured or non-secured loans from another asset (car, home equity)

Homeowners may not obtain a bridge loan (also known as “gap financing”) or engage in other temporary financing methods to meet the monetary investment requirement or payment of closing costs needed to close the purchase transaction. This limitation is comprised of subordinate liens, unsecured loans, cash withdrawals from credit cards, seller financing along with other lending commitments that can’t be satisfied at closing.

What is the Role of the Realtor?

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

Choosing a House for Purchase & Getting an Home inspection

All seniors are strongly encouraged by HUD to get a home inspection from a licensed qualified professional home inspector (This is suggested but not required)

Assesses the physical condition: structure, construction, and mechanical systems
Identifies items which need to be fixed or replaced prior to the scheduled close of escrow date
Estimates the remaining useful life of the major 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
Have to be finished prior to closing by seller
Include in purchase agreement
Buyer can’t put any money into repairs before they own the house

Writing an offer

Must state offer conditional on sufficient inspection performed by qualified home inspector
Borrower might wish attorney to review – raises expenses but will be worth it
Client may cancel transaction any time prior to closing however this may affect earnest money deposit

Settlement Costs for a

Standard HECM costs plus:

Recording fees
Transfer taxes
Varies from state-to-state

Other things you need to know about reverse mortgage specialist:

There is no three day right of rescission unlike traditional HECM. The three-day right of rescission period isn’t applicable to HECM for Purchase transactions. Therefore, all initial advances could be paid on the day of closing by the escrow company. 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 engage in a HECM for Purchase transaction are ineligible for a reduction of the upfront MIP and loan companies will need to enter the transaction into FHA Connection as a new HECM.
HUD-approved housing counseling agencies that have been authorised 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.
Financial institutions need to be sure the house, when utilized as collateral for the HECM, satisfies the following property requirements:

1) It’s the borrower’s principal residence;

2) Construction is complete and a occupancy certification or something similar was issued;

3) Any construction mortgage loan 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 liens against the house exist.