ABC’s of a HECM Reverse Mortgage Loan
Created by the Housing and Economic Recovery Act of 2008, the “HECM for Purchase” Reverse Mortgage Loan became effective January 1, 2009. This product opened up a whole new world of possibilities for seniors. Whether it’s being closer to children or grandchildren, an Adults-Only community with all the amenities, locate to a warmer healthier climate or simply down size to that perfect home to meet your future retirement needs.
Home Equity Conversion Mortgage (HECM) for Purchase allows seniors, age 62 or older, to purchase a primary residence using loan proceeds from a reverse mortgage loan. Specifically, the product allows seniors to purchase a new principal residence and obtain a reverse mortgage loan within a single transaction. Before January 1, 2009, seniors who wanted to purchase their “Perfect Home” were required to pay ALL CASH or qualify for a loan plus pay purchase closing costs and then turn around and obtain a Reverse Mortgage Loan with additional refinance closing costs. This “one time close loan” can save you thousands of precious dollars and time (no delays from purchase to refinance).
- Eligible Property Types
- Ineligible Property Types
- Investment Requirements
- Allowable Funding Sources
- Unallowable Funding Sources
- Home Inspection
- Writing the Offer
The following property types are eligible for a Reverse Mortgage Loan:
- Single Family Residence (detached and attached)
- PUD’s (Planned Unit Developments) (Attached and Detached)
- Condominiums (Attached and Detached) with FHA approved HOA’s
- In Approved HUD Projects Manufactured Houses (Must meet HUD Requirements)
- 2-4 Unit Properties
The following property types are ineligible for a Reverse Mortgage Loan:
- Co-operative units Condo-Hotel projects
- Manufactured housing built before 1976 and lacking permanent foundation (Mobile Homes)
- Bed and Breakfast properties
- Boarding houses
- Unimproved land
- Working Farms Properties used for agricultural purposes
- Commercial Properties
- Unique Construction (Earth Homes, Dome Homes)
- Timeshares or segmented ownership properties
- Properties situated in: a) Flood Hazard Areas that are NOT eligible for participation in the National Flood Insurance Regular Product b) Any area defined by the US Geological Survey Observation as Lava Flow Zones 1 or 2
At closing, HECM borrowers must provide a monetary investment (commonly known as the Down Payment) 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 loan 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. The difference between principal limit and sales price for the property also includes any HECM loan related fees that are not financed or offset by other allowable funding sources. Borrowers may provide a larger investment in order to retain a portion of HECM proceeds for future draws.
- Borrower may only use their own money or money obtained from the sale of assets.
- Withdrawals from borrower’s savings or retirement accounts are acceptable.
Lenders will be required to verify the source of all funds prior to 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.
- Closing cost assistance
- Builder incentives
- Seller contributions or seller financing
- 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(down payment) 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.
All seniors are strongly encouraged (but not required) by HUD to get a home inspection from a licensed professional home inspector:
- 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 seller
- Buyer cannot put any money into repairs before they own the home
- Writing an offer: Must state offer contingent on satisfactory inspection conducted by qualified inspector
- Borrower may want attorney to review – increases costs but may be worth it
- Based on the potential number of parties who may be assisting the elder buyers (financial advisors, family members, etc.) please allow for additional time for these parties to review all documents and provide their opinion (longer contingency periods and escrow) as part of the purchase contract language.