A reverse mortgage purchase makes it possible for seniors age 62 or older in state to buy a new house with HECM loan proceeds. The main benefit to the senior is the fact that purchase only involves one set of settlement costs vs. buying a house and obtaining a reverse mortgage thereafter, which will incur two complete sets of settlement costs. Created by the Housing and Economic Recovery Act of 2008, the program became live on January 1, 2009. Qualified seniors must adhere to all HECM standards, each of the standard rules apply in addition to a few new guidelines.
A few of the fundamentals?
Can buy existing 1 to 4 unit properties
House must serve as principal residence
Once HECM purchase is finished, no additional liens are acceptable (Financial institution in 1st position, HUD in silent 2nd)
Will need to supply financial investment at closing from permitted funding source, see below for information and facts
Will need to reside in home within Sixty days of close of escrow
Newly built properties will need to have certificate of occupancy
There are some variations between a HECM for purchase and a standard HECM for seniors in state.
The major distinctions concern the properties types which are eligible, the money needed at close of escrow, the assistance of a real estate agent in the loan process, the recommendation of a professional house inspection, and certain closing costs.
Check out these other pages of information:
Lincoln, Rocklin, Roseville, Loomis, Penryn
Eligible Properties
Same as standard HECM loans
Ineligible Properties
Cooperative units
Manufactured housing built before 1976 and lacking permanent foundation
Bed and breakfast properties, boarding houses
What is the monetary investment requirement?
At close of escrow, HECM borrowers will have to provide a financial investment that will be applied to satisfy the difference between the HECM principal limit and the sales price for the home, in addition to any HECM loan related expenses that are not financed or offset by other allowed FHA funding sources. Basically, the funds from the reverse mortgage as well as any funds from the sale of the old home (or from the borrower’s personal savings) will have to be enough 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 that are not financed or offset by other permitted funding source. Borrowers could provide a larger investment amount so that they can maintain a percentage of HECM funds for future draws.
What are permitted funding sources?
Homeowner may only use their personal funds or cash obtained from selling assets.
Withdrawals from borrower’s personal savings or pension account are generally acceptable.
Lenders will be required to validate the origin of all the money prior to close of escrow. A verification of deposit, in addition to the most recent bank statement, could be used to validate savings and checking accounts. When there is a substantial increase in an account, or the account was opened up fairly recently, the lender will need to obtain a credible justification of the source of those funds. This type of paperwork will have to be provided in the FHA case binder. Failure to provide the mandatory documentation could lead to a notice of rejection and delay of endorsement.
What funding resources are ineligible?
Gifts
Loan discount points
Rate buy downs
Settlement cost assistance
Building contractors incentives
Seller 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 referred to as “gap financing”) or participate in other interim financing strategies to satisfy the financial investment requirement or payment of closing costs required to finalize the purchase transaction. This limitation is comprised of subordinate liens, personal loan, cash withdrawals from credit cards, seller financing along with other lending obligations that can’t be satisfied at closing.
What is the Function of the Realtor?
Seniors in state should consider a written contract – you should include contingencies for the sale of the senior’s previous house, the house inspection, etc.
Selecting a Property for Purchase & Obtaining an Inspection
All seniors are strongly encouraged by HUD to get a home inspection from a licensed skilled professional home inspector (It’s advised however it is not mandatory)
Evaluates the soundness: structure, construction, and mechanical systems
Identifies items which ought to be fixed or replaced prior to the scheduled close of escrow date
Estimates the remaining practical life of the main systems, equipment, structure, and finishes
Buyers can be at the inspection to ask questions about the condition and maintenance
Required Repairs
Health and safety or architectural integrity issues
Have to be completed prior to closing by seller
Include in purchase agreement
Buyer cannot put any cash into repairs before they own the house
Writing an offer
Must state offer contingent on satisfactory inspection done by qualified inspector
Borrower may wish attorney to review – raises costs but may be worth it
Client may cancel transaction any time before closing however, this could affect earnest money deposit
Closing Costs for a
Standard HECM closing costs plus:
Recording fees
Transfer taxes
Varies from state-to-state
Other things you should know about reverse mortgage in California:
There’s no three day right of rescission unlike traditional HECM. The three-day right of rescission period isn’t applicable to HECM for Purchase transactions. Consequently, all initial advances can be paid at the time of closing by the settlement agent. However, FHA encourages financial institutions to get their counsel’s opinion to assure compliance with Federal or state laws.
Seller incentives are not applicable to reverse mortgages.
Existing HECM borrowers who participate in a HECM for Purchase transaction are ineligible for a decrease in the upfront MIP and loan companies 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 individuals who anticipate utilizing the HECM for Purchase option on all topics covered in this Mortgagee Letter and other HUD requirements and issuances.
Lenders will need to ensure the home, when used as collateral for the HECM, meets the following property requirements:
1) It is the borrower’s principal residence;
2) Construction is complete and a CO or something similar has been issued;
3) Any construction loan 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.