Many borrowers and real estate professionals have never used a reverse mortgage to purchase a home or been involved in a transaction where one was used. This promotes a bit of uncertainty on the part of real estate professionals, sellers and some buyers when it seems that the whole process is new and different in many ways than what they have always done in the past.
Reverse mortgages can be a great way for borrowers age 62 and over to purchase a home without the income requirements of a traditional home loan. In addition, reverse mortgages require no regular mortgage payments making this finance vehicle ideal for those on a fixed income.
Before we begin:
- Using a reverse mortgage to purchase a home is not a difficult proposition if you follow the rules and the steps in the order they must be followed.
- Some “short-cuts” can cost you dearly in the long run if you try to circumvent the required process. Many of the minor delays can be made up during the rest of the process if you do it the right way the first time.
Before you make an offer
Real Estate Professionals and borrowers are often very accustomed to doing things the same way, over and over on each transaction and don’t understand when they have to make some alterations to their plans. As I stated, the changes when using a reverse mortgage are not difficult and when handled correctly are not overly time-consuming, but it is extremely important that you follow the procedures for originating a HUD Home Equity Conversion Mortgage (HECM or “Heck-um”) for purchase or you could wind up invalidating your documentation and having to start all over after you think you are ready to close and that is not good for buyers, sellers, real estate sales people or anyone.
The first step actually should take place before you ever write your first offer. You need to have an idea of the property type that you are going to purchase and realize that there are different parameters and requirements with different property types. Talk to your reverse mortgage lender and go over the properties you intend to view.
For example, if you are considering a condominium, if the project is not already HUD approved, it could take an additional 6 weeks or more to get the project approved, if it even meets HUD’s requirements and many projects are declined. If the project is not already approved and cannot be, you could wait 6 – 8 weeks or longer just to discover that the project will not be eligible for any FHA loan, reverse or forward. Other property types may not meet HUD guidelines so it is important that you resolve any known property issues from the start.
Receive Independent Counseling
Another step that can take place before the offer is written is that with a reverse mortgage, every borrower must receive a counseling certificate from a HUD approved counseling agency. On a purchase transaction, the borrower often will not know the property address when they do get their counseling so they would use their current mailing address for the certificate. The certificate is valid for up to 6 months and you can always get a new certificate if your current certificate expires.
Borrowers who wait until after a contract is written and accepted before attending their counseling are often placed under tremendous pressure to perform later when they can’t proceed with the transaction (ordering necessary HUD checks, appraisals and other services) since the counseling has not been completed. It’s often a “hurry up and wait” scenario when buying a home, especially if you choose a bank-owned or short sale property requiring additional approvals even after you make an offer, but once all the approvals are given, the pressure is there for the buyer to perform and without the counseling certificate, the loan cannot proceed.
Source of Funds
The next thing that every reverse mortgage buyer must be aware of is the down payment requirement. All the funds used for the down payment must be seasoned funds and the lender will require 3 months’ statements from the account where the funds are located to verify no large deposits which could be potentially borrowed funds as borrowed funds are not an acceptable source of down payment.
Borrowers should not move funds around from account to account prior to closing and any large deposits must be sourced as the borrowers’ funds. Gift funds from a family member are acceptable, but the same documentation requirements will apply to the funds being given as well as verification that the funds were actually transferred from that verified account to the borrower.
Another thing you must watch for in the case of a property is new construction, nothing can be done on the loan until the Certificate of Occupancy is issued on the property. This is important because you cannot even take a loan application that pre-dates the Certificate of Occupancy or the loan would not be eligible for Mortgage Insurance under HUD’s guidelines and therefore, no lender would approve the loan. Many buyers and sellers want to get a jump on the process, but waiting a few extra days to get the final inspection makes the difference of the loan going through or not.
Experienced Title / Settlement Service
The lender will need to know all of the title charges and the settlement agent charges before sending out the borrower’s Loan Application and Good Faith Estimate. Because certain fees are not allowed on a reverse mortgage and fees are not allowed to change, it is extremely important that you choose a title company and a settlement agent or escrow company that have reverse mortgage experience and preferably have closed other reverse mortgage purchase transactions. For experienced professionals who have closed many of these transactions, this is not a difficult loan to close but it can be a bit tricky for someone who has never worked with them.
Only after all of fees are known can the originator send out a loan application package and disclosures to the borrower who should be able to return them within 24 hours. As a borrower, you should make yourself fully aware of the Loan Comparison Page, Amortizations Schedule, Total All Loan Costs (TALC), closing Costs Worksheet and Annual Percentage Rate Disclosure (for fixed rate loans) in advance so that when you receive your actual loan package, you are completely familiar with the core documents and can just verify the terms are what you have already agreed to and return your package quickly if you have a short time frame for loan approval.
When your originator receives your package back, he can order the HUD Case Number, check all parties on the HUD GSA/LDP lists, run credit (even if credit was run earlier for prequalification purposes, there must be a credit report dated after the Case Number to be used with the loan) and it is only at this time that an appraisal can be ordered.
Many sellers and others involved in the transaction are anxious to get the appraisal ordered as soon as possible since this is often an area of concern however, the appraisal cannot be ordered prior to the Case Number being assigned by HUD. Then, the originator will order the appraisal through an Appraisal Management Company who will actually assign the appraiser. The time frame for appraisal is dependent upon the property location and the availability of FHA appraisers in that area.
Your originator will be working with Title, Escrow and all parties while the appraisal is being performed to collect all the other documentation required for submission to underwriting. Once the appraisal is received which is usually anywhere from 5 – 14 days (again depending on your location and the availability of comparable sales information), the originator will submit the file to receive the underwriting approval. The approval is relayed to all parties and any conditions required by underwriting are resolved so that the loan documents can be drawn for closing.
Final Closing Documents
This is another area where an experienced staff at the settlement agent’s office can help. Loan documents will not be drawn several days in advance as is often the case with standard or “forward” mortgages. The documents are date specific and therefore, you must be ready to sign them when they are prepared.
You will receive a sample set of the Note, Deed and the Security Agreement with the initial application. It is important that you read them and ask any questions you may have before closing time comes. If you wait until the closing date and then start asking questions that require time to answer to your satisfaction, it could require the documents to be redrawn by the lender creating additional delays and costs to you for additional services.
Selecting the right reverse mortgage lender who has closed many purchase transactions is important… knowing how to get the loan closed and having done many of them is half the battle.
If you would like to be prequalified for the reverse mortgage for home purchase or have a general question please give us a call Toll Free (800) 565-1722 or complete our Calculator for Home Purchase
Like this article? Here are 3 important links:
- Download our Free Purchase e-Book »
- Purchase Reverse Mortgage FAQ’s »
- HUD’s Website HECM for Purchase FAQ’s »
Listen in on our YouTube Chanel: “Yes, You Can Purchase With a Reverse Mortgage”