HECM For Purchase

Home Equity Conversion Mortgage / Reverse For Purchase

Are reverse mortgages a good way to buy a house? What is the process?

HECM for purchase is a reverse mortgage that allows seniors age 62 and older to purchase a home using reverse mortgage loan proceeds. For the senior, the primary advantage is that it only involves one set of closing costs, as opposed to buying a home and obtaining a reverse mortgage afterwards, which would require two sets of closing costs. Instituted by the Housing and Economic Recovery Act of 2008, this program was launched on January 1, 2009. In addition to the basic requirements, there are some new rules and regulations that need to be followed by qualified seniors.

What Are The Basics?

Purchase of existing properties with 1 to 4 units
A primary residence must be located on the property
After a HECM purchase is completed, additional liens are not permitted (Lender in first position, HUD in second).
An investment must be made from an allowable funding source at closing, see below for details
Within 60 days of closing, the property must be occupied
Newly constructed properties must have a certificate of occupancy issued by the time the Home Equity Conversion Mortgage purchase loan is insured by the Federal Housing Administration (‘endorsed’).

There are a few differences between a HECM for Purchase and a Traditional HECM, including the types of properties that may be eligible, the cash required at closing, the involvement of a Real Estate Agent in the loan process, and the recommendation of a professional home inspection.

A reverse mortgage is only available for certain types of properties.

HECM for Purchase Guidelines

Eligible Properties

The same as a home equity conversion mortgage or reverse mortgage that is federally insured.

Ineligible Properties

Cooperative units
In certain circumstances, manufactured homes may qualify for subsidy.
Bed and breakfast properties, boarding houses

Selecting A Home For Purchase & Getting An Inspection

HUD strongly suggests that all seniors get their home inspected by a licensed professional home inspector (this is not a requirement).

Assesses the structural, mechanical, and construction conditions
Identifies items that require repair or replacement before the scheduled closing date
Identify the remaining useful lives of the major systems, equipment, structure, and finishes
It is important for buyers to attend the inspection to ask questions about the condition and maintenance of the property

Required Repairs

Issues relating to health and safety or structural integrity
The seller must complete this before closing
Incorporate into a purchase agreement
Before they own the home, the buyer cannot make any repairs

Writing An Offer

A qualified inspector must conduct a satisfactory inspection before the offer can be accepted
A borrower may hire an attorney to review – this will increase costs, but may be worth it
Before closing, the client has the option to cancel the transaction, but this could affect the earnest money deposit

Closing Costs

Standard HECM closing costs plus:

Recordation fees
Transfer taxes
Varies from state-to-state

Common Questions About the HECM For Purchase Loan

What Is The Monetary Investment Requirement?

As part of the closing process, HECM borrowers are required to provide a monetary investment that will go towards satisfying the difference between the HECM principle limit and the sale price for the property, plus any HECM loan services fees that are not financed or offset by other FHA funding sources. The reverse mortgage proceeds and the proceeds from the sale of the old property (or from the borrower’s savings) must be sufficient to purchase the new property outright. Any HECM loan related fees not financed or offset by other allowable funding sources are also included in the difference between the principal limit and sales price for the property. Borrowers may make larger investments to retain a portion of HECM proceeds for future draws.

What Are Allowable Funding Sources?

The money they own or the money they obtained through asset sales.
Borrowers can withdraw from their savings or retirement accounts.

Prior to closing, lenders are required to verify the source of all funds. Savings and checking accounts can be verified with a verification of deposit, along with the most recent bank statement. A lender must obtain a credible explanation of the source of funds if there have been large increases in an account or if the account has just been opened. Documentation must accompany the FHA case pack. If the necessary documentation is not provided, a notice of rejection will be issued and the endorsement will be delayed.

What Funding Sources Are Ineligible?

Loan discount points
Interest rate buydowns
Closing cost assistance
Builder incentives
Seller contributions or seller financing
Credit card advances
Secured or non-secured loans from another asset (car, home equity)

To meet the monetary investment requirement or pay the closing costs required to complete the purchase transaction, borrowers may not obtain a bridge loan (also known as gap financing) or use other interim financing methods. A subordinate lien, personal loans, cash withdrawals from credit cards, seller financing and any other loan commitments that cannot be met at closing are among the restrictions.

What Is The Role Of A Real Estate Agent?

It is a good idea to include contingencies in the written agreement – such as the sale of the senior’s previous home, a home inspection, etc.

Other Things To Know About HECM for Purchase Loans

As opposed to a traditional HECM, there is no right to rescission after three days. HECM for Purchase transactions do not fall within the three-day right of rescission period. Settlement agents may therefore disburse all initial advances on the day of closing. FHA encourages lenders, however, to seek the counsel of their legal counsel to ensure compliance with federal and state laws.
Reverse mortgages do not qualify for seller concessions.
Lenders must enter the transaction into FHA Connection as a new HECM for existing HECM borrowers who participate in a HECM for Purchase transaction.

Those who anticipate using the HECM for Purchase option must be counseled by HUD-approved housing counseling agencies on all topics discussed in this Mortgagee Letter and other HUD requirements.
In order to qualify for a HECM, lenders must ensure the property meets the following criteria:
- The borrower lives in it as their primary residence;
- When the loan is insured by FHA (‘endorsement’) or by the lender’s deadline, construction is complete and a certificate of occupancy has been issued.
- The construction loan financing for the property, which will serve as collateral for the HECM loan, will be satisfied, as will the HECM liens, which will be in a first and second lien position, and at the time of closing, there will be no other liens against the property.

Property Flipping

To prevent cases of property flipping, lenders must take the following steps:
- Property financed with an FHA-insured mortgage can only be sold by the current owner;
- FHA financing requires a property to be sold within 90 days of its last sale; and
- For resales occurring between 91 and 180 days after the previous sale, FHA requires additional documentation when the new sale price is greater than 100% of the previous sale price.

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