HECM FOR PURCHASE
FUNDAMENTALS
What is it?
Who is it for?
HECM for Purchase is a great choice for those who are 62+ and:
Seek to rightsize, finding a home of optimal size to meet their needs, whether it be downsizing or upsizing.
Contemplate a relocation closer to family, a move to a low-maintenance community, a more convenient neighborhood, or the realization of acquiring their long-desired “dream house” without committing to a mandatory monthly mortgage payment.
Live on a fixed income and express concerns about affording a new home through either a cash purchase or traditional financing. They may also wish to refrain from tapping into their retirement nest egg.
Find their current home no longer aligning with their lifestyle, citing issues such as inconveniently located laundry facilities, a yard too extensive to maintain, or a preference for single-story living, leading them to seek a new home that better suits their physical needs.
Aim to enhance their purchasing power to secure a home with desired amenities.
Intend to safeguard a portion of the proceeds from the sale of their current home for a cash reserve or other retirement savings.
How does it work?
Advantages: HECM for purchase enables seniors to purchase a new home using loan proceeds from a HECM along with a down payment. With an H4P, only one round of closing costs, compared to the traditional method of buying a home and then obtaining a reverse mortgage which incurs two sets of closing costs.
Legislation:The Housing and Economic Recovery Act of 2008 established the HECM for purchase program. Effective date: January 1, 2009
Qualifications: Seniors must be aged 62 or above Must satisfy all existing HECM requirements. Must meet certain rules and regulations, such as residing in the property as their primary residence and maintaining the property per FHA.
REQUIREMENTS FOR PURCHASE
Some of the requirements for using a Reverse Mortgage to purchase your next home are as follows:
The property must serve as the buyer’s primary residence
No further liens are allowed after the completion of the HECM purchase, with the lender in the first position and HUD in a silent second position.
At closing, the buyer must provide a down payment from an allowable source.
The buyer must occupy the property within 60 days of closing, which is standard on any FHA loan.
ELIGIBLE PROPERTIES
Single Family Homes
FHA-Approved Condominiums, Townhouses, or Planned Unit Developments (PUDs)
2-4 Unit Homes that are Owner-Occupied
Manufactured Homes meeting HUD guidelines that are titled and taxed as real property under local law
Modular Homes
NON ELEGIBLE PROPERTIES
Mobile Homes (Non-HUD compliant and usually have a VIN number…these are different than manufactured homes)
Cooperative Units
Commercial Property
Working Farms
Investments Property
Second Homes
Properties located on reservation land
WHAT PROTECTION IS THERE FROM OWNING MORE THAN THE HOUSE VALUE?
HOW ARE THE LOAN AMOUNTS CALCULATED?
The minimum required down payment for the buyer typically ranges from 45% to 62% of the sale price, as established by the Department of Housing and Urban Development (HUD). These loans, based on age, enable older borrowers to qualify for a higher amount in loan proceeds.
The initial Principal Limit (PL) is defined as the maximum amount that is available to a HECM borrower at the time of closing. Keep in mind, access to the full PL may be restricted at closing (fixed rate) or in the first year of the loan (adjustable rate).
The PL is calculated using tables, provided by HUD, that consider two factors – the age of the youngest borrower (or Eligible Non- Borrowing Spouse if applicable) and the expected average mortgage interest rate (Expected Rate). Higher ages generally result in higher principal limits. Higher expected rates generally result in lower principal limits.
However, in an abnormal rate environment, these amounts could vary. It is for this reason we’ll want to run a scenario specific to your situation in order to give you a more accurate number to work with.
FUNDING SOURCES TYPES
Permissible source for funding:
Personal funds
Proceeds from asset sales
Withdrawals from the borrower’s savings or retirement accounts
Methods for authentication of the origin of funds:
Verification of deposit
Most recent bank statement
Non-Permissible sources for funding:
Builder incentives
Seller contributions or financing
Credit card advances
Secured or unsecured loans obtained from another asset such as a car or home equity
Bridge loans
Personal loans
Subordinate liens
Cash withdrawals from credit cards
REPAIRS AND CONTRACT
REPAIRS
WRITING THE CONTRACT
When writing the sales contract, real estate agents should allocate time to review the following sections:
Must include the FHA Amendatory Clause and Real Estate Certification
Seller Closing Costs – Sellers can pay for fees that are reasonable and customary for the market and typically include: Fees required to be paid under State or local law (Transfer taxes) Fees typically paid by a seller in that locale (Owner’s Policy, Settlement fee or Escrow fee, deed prep, deed record). Purchase of a home warranty policy by the seller
The contract should not include personal property as the HECM proceeds are for the purchase of Real Property only
The contract cannot contain any rent back options
The contract may include real estate commission if the Realtor is also the Buyer, but any commission paid to the buyer cannot be a funding source of the H4P
If the appraisal identifies any repair items, the seller must pay for and complete all repairs prior to the closing of the transaction.
The HECM program is used in only a Primary Residence transaction.
HECM OBLIGATIONS AND
RESIDENCY CERTIFICATION
HECM OBLIGATIONS
Occupy the home as their primary residence
Maintaining the property in good repair
Payment of property taxes
Payment of homeowner insurance
Payment of all other property charges including, but not limited to: flood insurance, HOA dues, condo dues, etc.
HECM OCCUPANCY CERTIFICATION
The Home Equity Conversion Mortgage is exclusively for primary residences. Consequently, homeowners must confirm their residency by mailing in the “Occupancy Certification” one year post-closing and annually thereafter. It’s important to note that this process does not involve inspecting the property, and homeowners need not perceive it as an intrusion of their privacy. The homeowner merely needs to return the signed certification, affirming they continue to fulfill the program’s requirements.
In the event of non-response, the servicer may need to initiate follow-ups through phone calls and potentially visit the property.
