Can a Reverse Mortgage be used to Build a New Home?

October 21, 2015

Ken Tighe has sent the following question in the ask experts series. My wife will be 65 on April 5, 2017 and I was 65 on 2/4/2015. We currently own our home but want to build a new home on a lot we own that will better accommodate us in our advanced age. We have the cash to build the new home but can a reverse mortgage be used to pay off the construction loan once the home is completed?

Hi Ken,

I would love to give you a simple and quick answer but the truth is “maybe”. There are so many caveats that surround this type of transaction that could make the property ineligible at the time you go to retire the construction financing that I can’t tell you for sure that the construction loan can be retired by the reverse mortgage.

For example, HUD just implemented a new rule that you cannot use reverse mortgage proceeds to pay off a loan that was taken less than 12 months ago. That would mean that the last draw of the construction loan had to be taken at least 12 months prior to the reverse mortgage application. You also have a lot of issues you have to concern yourself with depending on whether or not you are the builder and required warranties, etc. for new construction that you can’t give to yourself. Depending on the location of the property, there are sometimes issues with the permits and final Certificates of Occupancy with relation to the HUD requirements of same.

Then there is always the property itself. If you build in an area where similar homes and sales of such are abundant, getting an appraisal is usually not an issue but if you build in a rural area or if your property is unique and recent similar sales cannot be found, it may be a great home but may not be eligible for HUD insurance and therefore ineligible for the HECM reverse mortgage loan.

To make a long story short, there is a possibility that if you need to pay off that construction loan within the first 12 months of construction and need take out financing for that specific function, the reverse mortgage may not achieve that goal. If all the circumstances come together to meet HUD requirements, it might be fine but I don’t think I would recommend proceeding if that was the only way the deal would work and you would risk financial peril if the reverse mortgage was not available to take out the construction loan immediately preceding completion.

If you can build the home and the reverse mortgage is your preference but not a requirement, and knowing that you may have to wait a year to apply after completion or that you may never be able to qualify for a reverse mortgage on the property and want to construct the home anyway, then at least you can plan accordingly.

Also see:

Using a Reverse Mortgage for New Construction Purchase

If you have a question about the reverse mortgage for home purchase program, call us Toll Free (800) 565-1722 or request a quote here.

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2 Comments on this Article

Curt
July 26th, 2017

I am building our retirement home in the new future (months) and am concerned on the process since there is no home at the present time and no appraised value until I am done. What issues will I need to be aware of?

Do I need to have anything done prior to breaking ground? I own the lot already, have plans and I am acting as General Contractor on the project.

I am sure there are many more questions that I haven't thought of, feel free to add any other comments.

When should I do the HECM consulting?
Reply to Curt
- Michael Branson
  July 26th, 2017
  
  Hello Curt,
  
  There is no pre-approval available and you can't apply until the home is complete and the certificate of occupancy has been issued on the home at the earliest. So what that means is that until the home is built, you will not know if you will be able to get the reverse mortgage. The guidelines state that we must use the current appraised value or the cost to construct plus what you paid for the land (if you just bought the land - if you have owned the land for a long time we can use the current value of the land). If you need or want to just use the current value, you need to wait at least a year after the certificate of occupancy has been issued before you apply.
  
  Counseling is good for 6 months so you would want to time your counseling appropriately. Nothing to know before you break ground, the loan is only really concerned with the time after the CofO is issued. The only thing I would really call a concern is that you need to consider that unless your home is in a strictly residential area, with no outbuildings, and meets all HUD guidelines with plenty of recent sales of similar properties at the time the appraisal is done to support the value, there is always the chance that the home will not meet the HUD guidelines in effect at the time if there are any unique qualities (i.e. large acreage, zoning other than residential, no sales of similar homes available to establish a value at the time you apply for the loan, many outbuildings and more than one residence on the lot, a dome home or other unique structure, etc.). I could not begin to cover all the HUD manuals, handbooks, mortgagee letters and notices pertaining to property requirements here though.
  
  So while you plan to get a reverse mortgage, you need to consider what happens if you can't get a reverse mortgage at that time? If it is not ideal but would not break the bank, then proceed as you see best. If it makes the difference of being able to keep the home or losing it because all your construction loans are coming due and you were really counting on the reverse mortgage to pay them all off, it might be a risky proposition in some cases to proceed not knowing (as it would be if you put all your eggs in any one basket without a guaranteed end loan product locked in in advance).
  Reply to Michael