Buying a home with a Reverse Mortgage
The HECM for Purchase allows seniors, age 62 or older, to purchase a new principal residence using loan proceeds from the reverse mortgage. One of the main benefits of the HECM for purchase is that homeowners are not required to make monthly mortgage payments when they purchase a home with a HECM (a federally insured reverse mortgage loan).
What is the purpose of the HECM for Purchase program?
The Reverse Mortgage Purchase program was designed to allow seniors to purchase a new principal residence and obtain a reverse mortgage within a single transaction. The program was also designed to enable senior homeowners to relocate to other geographical areas to be closer to family members or downsize to homes that meet their physical needs, i.e., handrails, one level properties, ramps, wider doorways, etc.
What property types are eligible?
Existing one-to-four unit properties where construction has been completed and the property is habitable as evidenced by local jurisdiction issuance of certificate of occupancy or its equivalent.
Can a HECM for purchase be used to satisfy outstanding payment obligations associated with a land contract?
Yes, if the property will be used as collateral for the HECM and the mortgage will be held in fee simple, or on a leasehold under a lease for not less than 99 years which is renewable, or under a lease having the remaining period of not less than 50 years beyond the date of the 100th birthday of the youngest mortgagor.
Can a lender take application on a property that is under construction and not habitable?
No. The lender may only take application once the Certificate of Occupancy or its equivalent has been issued. Many builders are not familiar with the reverse mortgage for purchase program, however, we can help. Call us today!
What property types are ineligible?
- Cooperative units
- Newly constructed residences where a Certificate of Occupancy or its equivalent has not been issued by the appropriate local authority
- Boarding houses
- Bed and breakfast establishments
- Existing manufactured homes built before June 15, 1976; and
- Existing manufactured homes built after June 15, 1976 that fail to conform to the Manufactured Home Construction Safety Standards, as evidenced by affixed certification labels (e.g., data plate and HUD certification label) and/or lack a permanent foundation as required in HUD’s Permanent Foundations for Manufactured Housing Guide or homes that are installed or were occupied previously at another site or location.
Are set asides for property charges allowed (i.e., ground rent, tax, insurance, Homeowner Association fees, etc.)?
Yes. Mortgagors will continue to have the option of electing to have the lender withhold funds from their monthly payments or by charging such funds to the line of credit.
Are set asides for repairs allowed?
To be eligible for federal insurance, the property must meet FHA minimum property requirements. All repairs to correct major property deficiencies that threaten the health and safety of the homeowner and/or jeopardize the soundness and security of the property must be completed by the seller prior to closing. Appraisers must complete the appraisal report as “Subject To” the completion of these repairs.
Major Property Deficiency Examples:
- No running water
- Leaking roof
- No primary heating source
- Inadequate electrical system (including lighting)
- Inoperable doors and windows (inhibited ingress and egress)
- State or local code violations
Is the Amendatory Clause required?
Yes. An appraisal is required for all HECM transactions, including purchase transactions. The execution of the Amendatory Clause does not negate federal and state mandates on providing a copy of the appraisal to the consumer.
Can gifts be used as down money?
Prospective mortgagors may use their own money or money obtained from the sale of assets. The monetary investment requirement can also be met by the use of approved funding sources as defined inHUD Handbook 4155.1 REV-5, section 2-10, with the exception of the following funding sources which may not be used:
- Sweat Equity
- Trade Equity
- Rent Credit
- Cash or its equivalent, in whole or in part, from the following parties, before, during or after loan closing:
– The seller or any other person or entity that financially benefits from the transactions, or
– Any third party or entity that is reimbursed, directly or indirectly, by any of the parties described in the previous bullet.
How is the purchase price (maximum claim amount) and loan amount (principal limit) calculated?
For HECM purchase transactions only, the maximum claim amount will be the least of: 1) the appraised value; 2) sale price; or 3) FHA mortgage limit for a one family residence. The principal limit is determined by multiplying the maximum claim amount by the principal limit factor corresponding to the age of the youngest mortgagor, the expected interest rate and the initial MIP option that the borrower selects. These can vary with time, so call The Reverse Mortgage Team to find out how much you qualify for.
Can prospective mortgagors apply credit card cash advances towards the required monetary investment or closing costs?
No. This would be a violation of 24 Code of Federal Regulations 206.32(a), which requires all outstanding obligations connected to the HECM transaction, purchase or otherwise, to be satisfied prior to or on the date of closing.
Are seller concessions or seller financing allowed?
No.
When purchasing a new principal residence, if the HECM proceeds do not cover the sales price, can part or all of the property’s indebtedness be subordinated behind the first and second HECM liens if the existing lien holder is willing to execute a subordinate agreement?
No. All existing liens must be satisfied at the HECM closing.
If the source of funds comes from the sale of the homeowner’s principal residence or other owned property, and the sale is occurring the same day as the closing on the HECM, can a copy of the executed HUD-1 and cashier’s or certified check, evidencing the sale, be used to verify the funding source?
Yes. In addition to the HUD-1, a copy of the sales contract executed by all parties and a copy of the cashier’s or certified check bearing the name of the seller can be used to verify the funding source.
Can prospective mortgagors obtain a secured or non-secured loan from another asset (i.e., car, home equity line of credit, or investment property or second home) to satisfy the monetary investment or closing costs?
No. Consistent with existing policy, bridge loans and other interim financing methods associated with HECM transactions are prohibited, unless the unpaid or outstanding obligation can be satisfied prior to or on the day of closing.
In lieu of providing a Verification of Deposit with the most recent bank statement, what other alternative documentation will FHA accept?
FHA will accept the two most recent, consecutive original bank statement(s), belonging to the borrower, which covers the most recent (three-month period) and previous month’s balance. Bank statements that are more than 120 days old prior to the closing date are not acceptable.
Does FHA have special eligibility requirements for first-time homebuyers?
No. FHA encourages all first-time homebuyers to meet with a reverse mortgage counselor that offers pre-purchase counseling to educate themselves on the responsibilities of becoming a homeowner. Prior to signing a sales contract, FHA encourages a home inspection of all properties that will serve as collateral for HECM for purchase transactions. The inspection serves two purposes, to determine the magnitude, if any, of repairs and/or rehabilitation the home as well as helps the buyer to negotiate the purchase price in situation where a home requires repair or rehabilitation.
