HECM For Purchase
HECM For
Purchase
A reverse mortgage purchase, or HECM for Purchase, allows seniors age 62 or older to buy a new home with HECM loan proceeds. The primary benefit is that the transaction only involves one set of closing costs, versus buying a home and obtaining a reverse mortgage thereafter, which would incur two complete sets of closing costs.
The basics
- Can purchase an existing 1 to 4 unit property
- The property must serve as your principal residence
- You must occupy the property within 60 days of closing
- You provide a monetary investment at closing from an allowable funding source
- Once the purchase is complete, no additional liens are permitted (lender in 1st position, HUD in silent 2nd)
- Newly constructed properties must have a certificate of occupancy issued by the time the loan is insured by FHA ("endorsed")
What makes it different from a traditional HECM
Created by the Housing and Economic Recovery Act of 2008, this program became live on January 1, 2009. Qualified seniors must conform to all HECM requirements. All of the basic rules apply, in addition to some new rules and regulations.
The major differences concern the property types that are eligible, the cash required at closing, the involvement of a real estate agent in the loan process, the recommendation of a professional home inspection, and certain closing costs.
Eligible properties
- Same as federally insured reverse mortgages, or Home Equity Conversion Mortgage loans
Ineligible properties
- Cooperative units
- Manufactured homes (in certain circumstances they may be eligible)
- Bed and breakfast properties and boarding houses
Buying a home with a HECM
What to expect as you select a home, make an offer, and close.
Selecting a home and getting an inspection
All seniors are strongly encouraged by HUD to get a home inspection from a licensed professional home inspector. This is suggested but not required.
- Evaluates the physical condition: structure, construction, and mechanical systems
- Identifies items that need to be repaired or replaced prior to the scheduled closing date
- Estimates the remaining useful life of the major systems, equipment, structure, and finishes
- Buyers should be at the inspection to ask questions about the condition and maintenance
Required repairs
- Health and safety or structural integrity issues
- Must be completed prior to closing by the seller
- Include them in the purchase agreement
- The buyer cannot put any money into repairs before they own the home
Writing an offer
- The offer must be contingent on a satisfactory inspection conducted by a qualified inspector
- The borrower may want an attorney to review, which increases costs but may be worth it
- The client may cancel the transaction at any time prior to closing, but this could affect the earnest money deposit
Closing costs
Standard HECM closing costs, plus:
- Recordation fees
- Transfer taxes
- Costs vary from state to state
Get A No Obligation
Evaluation And Quote
Thinking about buying a new home with a reverse mortgage? I'm happy to walk you through how it works.
Common questions about HECM for Purchase
The details on funding, agents, and what else to know.
What is the monetary investment requirement?
At closing, HECM borrowers must provide a monetary investment which will be applied to satisfy the difference between the HECM principal limit and the sales price for the property, plus any HECM loan related fees that are not financed or offset by other allowable FHA funding sources.
In other words, the proceeds from the reverse mortgage and any funds from the sale of the old property (or from the borrower's savings) must be enough to purchase the new property outright. Borrowers may provide larger investment amounts in order to retain a portion of HECM proceeds for future draws.
What are allowable funding sources?
- Their own money or money obtained from the sale of assets
- Withdrawals from the borrower's savings or retirement account
- Credits (contributions) up to six percent of the sales price from an interested party, such as a seller, builder, developer, real estate agent, mortgagee, third party originator, other parties, or a combination of parties with an interest in the transaction
Lenders will be required to verify the source of all funds before closing. A verification of deposit, along with the most recent bank statement, may be used to verify savings and checking accounts. If there is a large increase in an account, or the account was opened recently, the lender must obtain a credible explanation of the source of those funds. Such documentation must be provided in the FHA case binder. Failure to provide the necessary documentation may result in a notice of rejection and delay of endorsement.
What funding sources are ineligible?
- Closing cost assistance
- Credit card advances
- Secured or non-secured loans from another asset (car, home equity)
Borrowers may not obtain a bridge loan (also known as gap financing) or engage in other interim financing methods to meet the monetary investment requirement or payment of closing costs needed to complete the purchase transaction. This restriction includes subordinate liens, personal loans, cash withdrawals from credit cards, seller financing, and any other lending commitment that cannot be satisfied at closing.
What is the role of a real estate agent?
A senior should consider a written agreement. You should include contingencies for the sale of the senior's previous home, the home inspection, and more.
What else should I know about HECM for Purchase loans?
- There is no three day right of rescission, unlike the traditional HECM. The three day right of rescission period does not apply to HECM for Purchase transactions, so all initial advances may be disbursed on the day of closing by the settlement agent. However, FHA encourages lenders to seek their counsel's opinion to ensure compliance with Federal or State laws.
- Seller contributions are now allowed (see allowable funding sources).
- Existing HECM borrowers who participate in a HECM for Purchase transaction are ineligible for a reduction of the upfront MIP, and lenders must enter the transaction into FHA Connection as a new HECM.
- HUD-approved housing counseling agencies that have been approved to provide reverse mortgage counseling must counsel those who anticipate using the HECM for Purchase option on all topics covered in the Mortgagee Letter and other HUD requirements and issuances.
- Lenders are required to ensure the property, when used as collateral for the HECM, meets these requirements: (1) it is the borrower's principal residence; (2) construction is complete and a certificate of occupancy or its equivalent has been issued by the time the loan is insured by FHA ("endorsement") or by the lender's deadline; and (3) any construction loan financing for the property is satisfied, and the HECM liens will be in a first and second lien position, with no other liens against the property at closing.
Protecting Seniors
Preventing property flipping
To avoid cases of property flipping, lenders must take steps to ensure that:
- Only current owners of record may sell properties that will be financed using FHA insured mortgages
- Any resale of a property may not occur 90 or fewer days from the last sale to be eligible for FHA financing
- For resales that occur between 91 and 180 days where the new sales price exceeds 100% of the previous sales price, FHA will require additional documentation validating the property's value
Report a property flipping scam
If a lender suspects a senior has become a victim to a property flipping scam, the Processing and Underwriting Division of the local HOC should be contacted. Complaints may be reported to HUD's Inspector General Hotline:
HUD Office of Inspector General Hotline, GFI451 7th Street, SW
Washington, DC 20410
Toll free: 1-800-347-3735
TDD: (202) 708-2451
Questions About
HECM For Purchase?
For more information about HECM for Purchase, please contact me.