Introduction: A Reverse Mortgage for Purchasing Property
Have you ever considered using a reverse mortgage to purchase a property? You might be wondering how this works. A reverse mortgage purchase, also known as HECM for purchase, provides a unique opportunity for seniors aged 62 or older to buy a new home using the proceeds from a reverse mortgage. What sets this apart is that the transaction involves just one set of closing costs, avoiding the need for two complete sets of closing costs that would be incurred when buying a home and then obtaining a reverse mortgage. The program was established by the Housing and Economic Recovery Act of 2008 and went live on January 1, 2009. While adhering to all HECM requirements, this program adds some new rules and regulations to the mix.
Key Basics of HECM for Purchase:
- You can purchase an existing 1 to 4 unit property.
- The purchased property must serve as your principal residence.
- After the HECM purchase, no additional liens are allowed (Lender in 1st position, HUD in silent 2nd).
- A monetary investment is required at closing from an allowable funding source (details below).
- You must occupy the property within 60 days of closing.
- For newly constructed properties, a certificate of occupancy is required before the Home Equity Conversion Mortgage purchase loan can be insured by FHA (‘endorsed’).
Differences from Traditional HECM:
- Property eligibility varies.
- Cash required at closing differs.
- Real Estate Agent involvement may vary.
- A professional home inspection is recommended.
- Certain closing costs may differ.
Eligible and Ineligible Properties:
- Same as federally-insured reverse mortgages or Home Equity Conversion Mortgage loans.
- Cooperative units.
- Manufactured homes (though they might be eligible in certain circumstances).
- Bed and breakfast properties and boarding houses.
Selecting a Home and Inspection:
It’s strongly advised by HUD to get a home inspection from a licensed professional home inspector (suggested but not required). An inspection:
- Evaluates the property’s physical condition, structure, construction, and systems.
- Identifies items requiring repair or replacement before closing.
- Estimates the remaining useful life of major components.
- Allows buyers to ask questions and understand maintenance needs.
- Health, safety, or structural issues must be fixed before closing by the seller.
- These repairs should be included in the purchase agreement.
- Buyers cannot invest money in repairs before owning the home.
Writing an Offer:
- Your offer should be contingent on a satisfactory inspection by a qualified inspector.
- Consider involving an attorney for review, though this might increase costs.
- Cancelling the transaction before closing may affect earnest money deposits.
In addition to standard HECM closing costs, you might also incur:
- Recordation fees.
- Transfer taxes, which can vary by state.
Monetary Investment and Funding Sources:
- At closing, HECM borrowers must provide a monetary investment to cover the difference between the HECM principal limit and the property’s sales price, along with any HECM loan fees not financed by allowable funding sources.
- Allowable funding sources include the borrower’s own money or funds from asset sales, savings, or retirement accounts.
Ineligible Funding Sources:
- Loan discount points.
- Interest rate buydowns.
- Closing cost assistance.
- Builder incentives.
- Seller contributions or financing.
- Credit card advances.
- Loans from other assets like cars or home equity.
Role of a Real Estate Agent:
Seniors should consider a written agreement, possibly including contingencies for the sale of their previous home and the home inspection.
For more information, feel free to contact us.
Please note that the information provided is subject to change. Always consult a qualified professional for the most up-to-date advice.