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HECM for Purchase

It can’t be done… Or can it?

HECM FOR PURCHASE

Many seniors choose to move into a different home as they age. They may move to another city to be closer (or further) from their family, while others may move for better climate or health concerns. Seniors may be “right-sizing” to a home that is easier to maintain or want to move into a house with better amenities or different neighborhood. Sometimes, seniors move simply for a change of scenery. There are many, many reasons to move, but the fact is… that seniors do move!

The “HECM for Purchase” (aka: “Reverse for Purchase”) program is a unique way to finance the purchase a home. It was designed by HUD in 2009 to allow seniors to purchase a new principal residence and obtain a reverse mortgage within a single transaction. The HECM for Purchase was also designed to enable senior homeowners to relocate to other geographical areas in order to be closer to family members or “right-sizing” to homes that meet their physical needs (handrails, one level properties, ramps, wider doorways, etc.). Regardless of your reasons for moving, you can use a Reverse Mortgage to assist.

Prior to 2009, HUD did not allow people to purchase homes with Reverse Mortgages. Seniors actually used to purchase the home on a conventional mortgage or paid cash and then had to apply a few days later for the Reverse Mortgage. Unfortunately, they were subjected to closing costs twice.

Because the HECM for Purchase is still a relatively new way to finance few home buyers and Realtors are even aware that it exists. In 2013, a national survey of 1,100 Realtors, only 12 Realtors (or 1.1%) knew details about the Reverse for Purchase financing option. Why don’t Realtors know about the HECM for Purchase program? Remember, it is relatively new; the first HECM for Purchase transaction only closed in June 2009. Given the fact that few companies specialize in the Reverse Mortgage program, the HECM for Purchase continues to be unknown.

11,000 people turn 62-years old each day. 26% of homes sold in America are to people at least 55-years old. Of this group of 55+ year old homebuyers, the HECM for Purchase program would have benefitted 23% of them. The others did not qualify or benefit because they were not old enough (55 is too young; must be 62+ years old for a RM), have a large enough down payment or didn’t feel like there was a benefit to themselves for various reasons (like the new house wasn’t their primary residence, they planned to move to a different home in the future, etc.).

This page is dedicated not only to the aging population that New Mexico Reverse Mortgage serves, but to the Realtors, Builders and other respected peers in the real estate industry. Our aim is to educate everyone and to show that there is a new way to buy a home.

Why consider a HECM for Purchase?

Consider the following scenarios in which you are buying a home, have $150,000 in cash and your #1 objective is that you DO NOT want a house payment. (The numbers are only meant for illustratory purposes; the older you are, the less down payment is needed).

You have 3 choices:

  1. You buy a $150,000 home and pay cash for it.
  2. You buy a $150,000 home; put $70,000 down; finance the remaining $80,000 with a reverse mortgage. You still have $80,000 cash in your bank account as a nest egg for your future use.
  3. You buy a $300,000 home; put $140,000 down; finance the remaining $160,000 with a Reverse Mortgage and still have an extra $10,000 in your back pocket.

Buying a new home can be much more affordable if you allow yourself to think outside the box. All three of the above options accomplish your primary goal of not having a monthly house payment! In the past, most seniors and their Realtors failed to consider the exciting second and third options listed above. Only you can decide which of the three options works best, but now you know about a new source of purchase money financing that does not require monthly Principal and Interest payments.

New Mexico Reverse Mortgage urges you and your Realtor to meet with us prior to shopping for a home. We’ll give specific numbers and other important details about the process. The Policies and Guidelines for a HECM for Purchase do have nuances and there is a specific process to purchase a house using a Reverse Mortgage that you both need to be aware of.

However, in the FAQ section below we’ve addressed many questions that will be helpful to anyone involved in a HECM for Purchase. If you’re shopping for a new home, we encourage you to take time to read it and write down any unanswered questions.

These materials are not from HUD or FHA and were not approved by HUD or a government agency. New Mexico Reverse Mortgage NMLS #1102656; Mace Kochenderfer, CRMP NMLS #213789

HECM for Purchase FAQ’s

What is HECM for Purchase?

HECM for Purchase allows seniors, age 62 or older, to purchase a new principal residence using loan proceeds from the reverse mortgage.

When is Counseling Certificate issued?

Counseling prior to finding a home is encouraged.

Counseling should be completed prior to the application (but not required). The Counseling should have the senior’s current home address on the property.

What are the basic qualifications for a HECM for Purchase borrower?
  • All borrowers must be at least 62 years old and have been issued the mandatory Counseling Certificate.
  • The needed monetary investment must be documented and come from acceptable sources.
  • The home must be their Primary Residence and occupied within 60 days.
  • The home must meet the minimum FHA Guidelines for property standards.
  • A “financial assessment” will be completed to assure the investor that the senior can maintain their financial self-reliance and that the new property taxes and homeowners insurance will not cause a financial burden.
Is the fixed interest rate eligible in a HECM for purchase loan?

Yes. New Mexico Reverse Mortgage will show you both Fixed and ARM options. Any of the available Reverse Mortgage programs available can be used for the HECM for Purchase.

My last home went into foreclosure. Can I buy a new home?

Maybe. If the borrowers have had a home go into foreclosure, the Reverse Mortgage program is not available until 3 years after the foreclosure was completed has passed.

What documentation is needed to satisfy the requirement that the borrower must occupy the property within 60-days after closing?

The HECM Mortgage requires the new homeowner to occupy the home as their principal residence. It is not uncommon for the Underwriter to request a letter of intent from the borrower stating he/she intends to move into the property within 60 days of closing.

Can buyers get “Pre-Approved” prior to finding an existing home?

No. A Reverse Mortgage application cannot be taken prior to the Purchase Contract.

The new address must be listed as the subject property on the initial Loan Application. There is no such thing as a “Credit Only” loan approval.

Can buyers get “Pre-Approved” prior to the “C.O.” (or Certificate of Occupancy) issued on new construction?

No. Applications cannot be taken prior to the issuance of the Certificate of Occupancy. This is a HUD restriction and exceptions cannot be granted due to the fact that this is a Home Equity product and not a Conforming type of loan.

Are Builders required to submit, Building Certification of Plans, “Spec-Sheet” and 10-year warranties?

No. However, newly constructed properties must be 100% complete at the time of the appraisal inspection and initial application.

Can buyers enter into a Purchase Contract before the new home has been built?

Yes. Homebuyers can enter a contract with a builder for a new home before construction has even begun. They cannot make an application for the Reverse Mortgage until after the C.O. has been issued.

Can a lender take an application on a property that is currently under construction?

No. The lender may only take application once the Certificate of Occupancy has been issued.

If minor repairs are needed, can repair money be escrowed and those repairs completed within a few days or weeks after closing?

No. Repairs are required for any health, safety or structural integrity issues. The repairs must be included in the purchase agreement and must be completed by the seller PRIOR to closing.

The Buyer cannot put any money into repairs before they own the home.

The Appraiser will be required to re-inspect the property to certify that all repairs were completed satisfactorily and meet the FHA minimum standards.

I have another property that I intend to rent out. Can I still buy a new Primary Residence?

Probably, Yes. However, if your rental property is currently financed with an FHA loan, you will not be allowed to use the HECM for Purchase.

Borrowers may retain existing homes, but will be required to provide a Schedule of Real Estate Owned. Income and assets will be verified to ensure the senior has sufficient income to support the other properties. Also, a Letter of Explanation, rental agreement (if available) and complete tax returns will likely be asked for.

Under what conditions may a senior cancel the purchase transaction?

The senior may decide to cancel the purchase transaction at any time prior to the date of closing. If the senior decides to cancel the transaction, he or she must notify all parties in writing. Where earnest money has been provided, the senior should review the sales contract to determine if the earnest money is refundable.

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.

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
  • Condominiums unless they are on FHA’s Approved Condo list
  • 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.

Follow this link to learn more about Reverse Mortgages on Manufactured Homes.

Can a HECM for Purchase be used to buy a home on Leased Land or 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.

Is it okay to set up an "escrow hold-back" or a "repair set-aside" with the title company to cover the cost of repairs found during the inspections?

No. For a home to be eligible to participate in the HECM for Purchase program, the property must meet FHA minimum property requirements at time of closing.

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. After the repairs are completed, the appraiser will go back to the property to certify the repairs were completed.

If there are minor deficiencies that were agreed to be repaired after closing, an escrow hold-back or repair set-aside are still not allowed. This will be interpreted as an “incentive to buy” which is not allowed by HUD.

What are some examples of "major property deficiencies?"
  • No running water
  • Leaking roof
  • No primary heating source
  • Security Bars without quick release latches preventing acceptable egress.
  • Empty swimming pools
  • Missing flooring
  • Missing stucco on the exterior of the building
  • Unsafe outbuildings or sheds
  • Inadequate access to all crawl or attic spaces
  • Inadequate electrical system (including lighting)
  • Inoperable doors and windows (inhibited ingress and egress)
  • State or local code violations
What are some guidelines to know when writing a Purchase Offer?
  • A HECM for Purchase transaction is very specific in how it is to be handled. Sometimes, people find it “easier to ask for forgiveness rather than asking for permission”. This is not the time to try that! Otherwise, Purchase Contracts may need to be cancelled and re-written.
  • The Offer must indicate that any contract is contingent on satisfactory inspection of the property and conducted by a qualified inspector.
  • The FHA Amendatory Clause and FHA Real Estate Certification must be written into the contract if it is not already included. (Most RANM contract templates already have this written into it, but check with the Qualifying Broker if you are unsure)
  • The Borrower is able to cancel the transaction at any time prior to closing. The Earnest Money may or may not be returned to the buyer but this is a question for the real estate licensee or a real estate attorney.
  • The Seller cannot pay any Closing Costs… even if it is customary for the market area.
  • The Seller CAN pay for the “Release of Lien” fee. That’s about it!
  • The Realtor, Lender or any other party with a vested interest in the transaction cannot pay any Closing Costs.
  • We come across issues where the Title Company will want certain fees on the Buyer’s side of the Settlement Statement (HUD-1) but then offset that fee with a Seller Credit. This is not allowed on a HECM Purchase.
  • The Seller can pay for “Inspections and Repairs”. However, if the Title Company tries to put it on the Buyer’s side of the HUD-1 and then offset it with a Seller Credit, it is not allowed. Please consult with the Title Company prior to writing this into any Offer or Purchase Agreement.
  • All parties must initial, sign and date all applicable places on the Purchase Agreement. It is not an issue if the agreement, addendums or amendments are missing signatures are dated after the loan application is made. However, all parties must sign properly before the closing documents can be prepared.
  • If the Purchase Contract or any supporting documents that are considered to be part of the contract indicate that the reduction of the sales price is due to the fact that the Buyer will be paying for fees that are normally absorbed by the Seller, HUD would consider that a non-allowed “Seller Inducement”.

The contract may need to be cancelled, a new contract written, the original loan application cancelled and a new loan application required. A new FHA Case Number, appraisal, inspections, title work and any other work dated prior to the new Purchase Agreement would be unacceptable and would need to be re-done. A delay in closing the transaction should be expected.

Is the Amendatory Clause required?

Yes. An appraisal is required for all Reverse Mortgage transactions, including purchase transactions. A copy of the appraisal is still required to be provided to the consumer.

I’ve heard that if the Lender fails to disclose a fee on the Good Faith Estimate, that they are required to pay that fee. Is that correct?

On a “Forward Mortgage”, that could be true depending on the circumstances. However on a Reverse Mortgage, if a fee is not disclosed correctly on the GFE the Lender cannot pay for it because it is considered an inducement and not allowed by HUD. That Loan Application would need to be cancelled and a new Loan Application would be required.

That said, it is important that the Lender be made aware of all potential costs. The costs provided must be accurate. Over-disclosing costs is not an issue. However, under-disclosing costs is an issue.

Are there special procedures to buy a foreclosed home?

No. However, note that the home must meet the standard FHA guidelines for safety, health and marketability of the property. Any required repairs must be completed prior to closing and confirmed by the appraiser assigned to do the inspection. The buyer is not allowed to pay for any repairs.

Are gifts an acceptable source of funding?

Seniors may use their own money or money obtained from the sale of assets. The required down payment can also be met by the use of approved funding sources as defined in HUD Handbook 4155.1 REV-5, section 2-10, with the exception of the following funding sources.

  • Gift of Equity
  • 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.

HUD Handbook 4155.1 REV-5, section 2-10

How is the loan size determined? Meaning, how are the Maximum Claim Amount and 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 ($625,500).

The Principal Limit is then determined by multiplying the maximum claim amount by the principal limit factor (determined by HUD) corresponding to the age of the youngest borrower, the expected interest rate and the Initial MIP option chosen.

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 allowed?

No. Reverse Mortgages are different. Seller or Builder concessions are applicable only to forward mortgages. They are not allowed on Reverse Mortgages.

My builder is providing a free upgrade or a reduction to the cost of certain upgrades! Isn’t that great?

Not from HUD’s point of view. Free or reduced upgrades provided by a Builder are considered an “inducement to buy” and not allowed by HUD.

To expand further… If a Builder is offering any type of incentive to purchase their home such as a Free Washer and Dryer, landscaping allowance, iPad or other goodie, this is considered Seller Concession or an “Inducement to Purchase” and is not allowed by HUD.

When purchasing a new principal residence and if the seller is willing, can a “Seller’s Second” lien be subordinated behind the Reverse Mortgage?

No. All existing liens must be satisfied at the HECM closing.

Is any seller financing permitted?

No.

Where is the Down Payment allowed to come from?
  • Cash from the sale of a prior home
  • Withdrawals from Retirement Accounts
  • Savings Accounts
  • Sale of an asset like a car, coin collection, art, etc. (special documentation will be required, so keep all your paperwork and appraisals to support the sale)
  • Gifts (the funds must be sourced, documented and a Gift Letter completed)
If the source of down payment is coming from the sale of the homeowner's principal residence and the sale of that home is occurring the same day as the closing on the HECM for Purchase, what is needed to document the necessary “Cash to Close”?

In addition to the HUD-1 Settlement Statement, a copy of the executed sales contract from the first property and a copy of the Cashier’s Check bearing the name of the seller can be used to verify the funding source. If applicable, proof of the wire transfer, evidencing the sale, may also be used to verify the needed funds.

Can I get a short term “Bridge Loan?"

No. Bridge Loans are not allowed.

Can we borrow money from ourselves by taking on a car loan or a cash advance on a credit card?

No. Funds needed to close on a transaction may not be borrowed from themselves or others.

Can senior homebuyers obtain a secured from another asset (i.e., car, home equity line of credit, or investment property or second home) to come up with enough money to close a HECM for Purchase?

No. According to FHA, “Consistent with existing policy, bridge loans and all 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.”

Any monies borrowed and “applied toward the HECM for purchase transaction and would violate 24 CFR 206.32 (a) which provides that there shall be no outstanding or unpaid obligations incurred by the HECM mortgagor in connection with the HECM transaction.”

What would be an "allowable FHA funding source" for gap financing of the equity portion?

A withdrawal from the home buyers savings or retirement account would be an acceptable funding source. A loan against the savings or retirement account is not acceptable to HUD.

What is “acceptable documentation” for the proof of assets?
  • A bank’s Verification of Deposit (VOD) along with 1 or 2 bank statements. Some banks may charge you to complete the VOD. $29.00 per VOD is the highest we’ve seen.
  • 2 or 3 most recent, consecutive bank statements. All pages to the statement(s) are needed even if that last page is blank. Bank statements that are more than 120 days old prior to the closing date are not acceptable.
  • All large deposits are required to be “sourced”. We must see the paper trail of all monies involved. Large deposits and other assets that cannot be documented will be problematic. Examples are gambling earnings, being repaid a loan that you lent a family member, “pennies from Heaven”, etc. The assets in an account that cannot be adequately documented may ultimately be unusable.
  • If monies are being transferred or wired from one account to another, we’ll need 2 or 3 bank statements for both accounts, withdrawal and deposit receipts and wiring instructions if applicable.
Can the borrower participate in a temporary “rent-back” or “lease-back” agreement with the seller?

No. When purchasing a new principal residence, the HECM mortgagor has 60 days to occupy the home. Unlike a forward mortgage, a temporary lease back to the seller (or anyone for that matter) is not allowed.

Prior to closing, the home buyer and seller should agree to a date for physical occupancy of the property. The lender should confirm the intent to occupy by obtaining a Letter of Intent from the homebuyers prior to closing.

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. You can find a list of HECM Counselors, here.

I’ve found a home that is in great condition. Can we skip the inspection in order to obtain a lower cost appraisal?

No. All homes, including new construction, will have the same type of appraisal completed.

Prior to signing a sales contract, FHA does encourage 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 any repairs or rehabilitation to the home.

Additionally, it serves to help the buyer to negotiate the purchase price in situation where a home requires repair or rehabilitation provided that the items noted are not a health or safety issue.

Is the appraiser’s inspection the same type of inspection we’d get from a Home Warranty company?

Nope! They are not even close to the same and we don’t want you to get them confused.

The appraiser’s job is to give a market valuation of the home being considered and to make sure the quality of the home meets or exceeds FHA minimum standards. The appraiser’s inspection is required by HUD.

A Home Inspector is much more thorough and looks for many other items. A quality report will be generated and will report anything from a toilet that wobbles a little to the test results for carbon monoxide leaks. This type of inspection is not required by HUD.

While New Mexico Reverse Mortgage does not require a one, we cannot stress the importance and peace of mind you’ll have by ordering a Home Inspection. Buying a home is a big investment and just because the Sellers are really nice people, does not mean you should blindly purchase the home. Your Realtor will confirm the importance and will give you further advice.

Why are the rules for a Reverse Mortgage Purchase transactions different than “forward” mortgages?

That is a good question. We’ve gotten different replies to that question directly from HUD (the department of Housing and Urban Development) and the most proper answer is likely that it is a combination of all their answers.

Reverse Mortgages are considered Home Equity Loans (not Conventional Loans) and different rules do apply. Additionally, statistics have shown that the senior population is taken advantage of more than any group of people. Often, real estate is also the senior’s largest asset. And, because of this unfortunate truth, seniors must be considered a “Protected Class”. HUD is in charge of creating the rules and policies that everyone in the Reverse Mortgage industry follows.

These rules and policies are not intended to complicate the process, but it does help the entire senior population as a whole and New Mexico Reverse Mortgage commends HUD for these protections.

HECM for Purchase – Summary

Now that I’ve overwhelmed you with an information overload, let me simplify.

The HECM for Purchase transaction flows very similarly to a Conventional Loan purchase transaction. Many of the above mentioned rules are actually the same as Conventional / “Forward” loans. But you’ve probably noted, that there are some idiosyncrasies to be aware of.

However, once you’ve gone through the transaction, you’ll see that it really isn’t so different and that there are some very nice benefits to thinking outside the box. Because the program is still in its infancy, HUD audits 100% of the HECM for Purchase files and Underwriters continue to be thorough with an extra eye on the details. Contact us with any unanswered questions or you may visit HUD’s Reverse for Purchase site.

New Mexico Reverse Mortgage tries to make every assurance that everyone involved in the real estate transaction understands how the program works. We developed this page as a resource for Realtors and Builders to use at the beginning of a transaction. If you are a senior buying a home, we’re glad you’ve read this page and have a little deeper understanding. Fortunately, you don’t need to memorize everything on this page. You can rely on us, your real estate agent, broker and/or builder to handle the details and keep you informed throughout the process.

New Mexico Reverse Mortgage… Helping you move forward, in Reverse.

These materials are not from HUD or FHA and were not approved by HUD or a government agency. New Mexico Reverse Mortgage NMLS #1102656; Mace Kochenderfer, CRMP NMLS #213789