We bought our home 11 months ago so obviously our mortgage was done last June. According to what I understand the loan has to be more than 12 more than old. We will have to wait a few months to do a reverse mortgage?
You and I also traded emails on this issue but I thought this was a good opportunity to let the community see the answer as well. There is no requirement to refinance into a new reverse mortgage loan of one year seasoning on a house that you acquired on a bona fide sale.
If you want to use a current appraised value that is higher than the original purchase price, without considering the original purchase price, there may be some provisions to that statement in some circumstances.
That is an important distinction and that is the only time seasoning of one year is required since a purchase (in the case of a rise in value in less than 12 months, in which you want the increase of value considered in the loan, but may not under some circumstances as I will demonstrate).
Let me explain.
HUD has no seasoning requirement and you can even use the current appraised value if the value is well supported by current sales and is in line with normal appreciation, etc. from when you bought the home. However, any increase in the first 12 months is up to underwriter discretion as to whether or not they will allow it to be counted toward the value.
For example, if you buy a home and 10 months later the home has appreciated and all the homes in the area are selling for $25,000 higher, the appraiser has good sales comps on his/her appraisal and the value is not in question, the underwriter will even allow the increase for the loan request.
In another example, if 6 months go by and the value is now considerably higher because you bought a distressed sale and now you want to be able to use a value of $150,000 more than you paid for the home, that would not be granted by the underwriter discretion.
Whereas on the other hand, if you could document that in that 6 month period you had put $100,000 improvements into the property and that was the reason for the increase in value, the underwriter would most likely allow the increase in value.
HUD relies on underwriter discretion in the matter with regard to what makes sense. But there is no 12 month rule that says you cannot do a reverse mortgage on a home that you purchased within that period of time.
Having said that, HUD does have a seasoning rule about paying off mortgages less than one year old but only those mortgages that resulted in cash out to the borrower. Purchase loans and loans on which the borrowers received no cash at closing from the new loan have no seasoning requirement as well.
In addition to this answer, I also should let borrowers know that if they build their own home, there is a 12 month seasoning requirement that the value will be determined by the cost to build or the appraised value, whichever is less (similar idea to buying the home, but it’s the cost to build instead of the purchase price).
It gets a bit more tricky when the borrower has owned the land for a longer period of time and for those scenarios we encourage you to contact us for a consultation.
Therefore, you have to look at the sales prices of similar homes around you to determine whether or not the wait would be a benefit or a possible risk. If sales prices are now much higher (not listing but actual sales), then you need to consider the difference and waiting may be to your benefit but if the value is well-supported, it may still be allowed.
If the value is only slightly higher or the same, there would be no advantage to waiting and no reason you would have to wait. However, one of the elements that determines how much you can borrow is the “effective interest rate” and if that rate goes up while you are waiting, the HUD calculation may end up giving you less money – even at a higher appraised value.
Keep in mind that we started this by saying properties you acquired through a bona fide sale. There are different rules for properties that you inherit or gained ownership through means other than a typical sale.
You also have to remember that when you purchased the home within the past 12 months, you will probably have to document the acceptable source of down payment funds as well whereas loans requested more than 12 months after a property has been purchase no longer carry this requirement.
Other things to consider when making the decision to apply before or after the 12 months have passed since purchase.