Using a Reverse Mortgage Purchase for New Construction

June 14, 2024

Can a contractor build a new home for you and finance it with a reverse mortgage upon completion? Thank you -Bob

The short answer to your question is, yes, you can. As a matter of fact, HUD has just made changes to the program effective in 2024 and made financing reverse mortgage purchases and new construction easier than ever with a reverse mortgage.

Table of Contents

• HUD Policies on Reverse Mortgages for New Construction

• Home Building Options for Reverse Mortgage Financing

• Custom Home Construction on Owned Land

• Updated HUD Guidelines for Reverse Mortgages: Documentation and Closing Considerations

• HUD’s Continuous Adaptation to Market Needs

• Ready to Build Your Dream Home with a Reverse Mortgage?

HUD Policies on Reverse Mortgages for New Construction

In response to evolving needs in the housing market, HUD has continued to refine its approach to reverse mortgages on new construction properties. Previously, obtaining a reverse mortgage on a newly constructed home could be delayed until a Certificate of Occupancy (COO) was issued. This posed challenges for borrowers eager to settle their construction financing or finalize their home purchase from a builder. However, HUD’s updated guidelines offer greater flexibility and clarity, making the process more accessible and streamlined for borrowers.

Home Building Options for Reverse Mortgage Financing

Builders can construct homes in several ways for the end buyer. Most commonly, homes are built as part of a tract or as single speculative properties (spec homes). The builder aims to sell and close the home as quickly as possible after completion. Under previous and current HUD guidelines, borrowers can begin their loan application before the home is completed, streamlining the process once the COO is issued.

Custom Home Construction on Owned Land

For those who own land, the option to contract a builder to construct a home is less common but viable. Landowners may finance the construction with personal funds or a construction loan. Subsequently, they might wish to replace these funds with a reverse mortgage, which can be initiated prior to construction completion under the updated guidelines.

Updated HUD Guidelines for Reverse Mortgages: Documentation and Closing Considerations

With the latest updates, HUD now provides additional pathways for verifying the completion and compliance of new construction properties in the absence of traditional COO issuance. When an appraisal for a new construction property is marked “Subject to Completion Per Plans & Specifications,” borrowers can now satisfy documentation requirements in one of the following ways:

Certificate of Occupancy: Issued by the local authority, this document confirms that the property meets all building codes and is ready for occupancy.
HUD-92051 Compliance Inspection Report: This report from the appraiser verifies the property is built according to the approved plans and specifications.

For areas where local authorities do not issue a COO, the HUD-92051 report can be completed by an ICC-certified RCI (Residential Combination Inspector) or CI (Combination Inspector). If such inspectors are unavailable, the report may alternatively be completed by a disinterested third party who is a registered architect, structural engineer, or a qualified tradesperson or contractor, provided they meet the licensing and bonding requirements of the state where the property is located.

Additionally, a Temporary Certificate of Occupancy can be accepted when minor items remain unfinished due to weather conditions—such as driveway installation, landscaping, or exterior painting. This ensures that borrowers are not unduly hindered by seasonal challenges that could delay the completion of their homes.

HUD’s Continuous Adaptation to Market Needs

These updated guidelines represent HUD’s commitment to adapting its policies to meet the needs of modern homebuyers and builders. By allowing more flexibility in the documentation process, HUD is ensuring that reverse mortgages can be as viable for new construction properties as they are for existing homes. This is a positive development for prospective reverse mortgage borrowers, offering them more options and expediting the loan process for newly constructed homes.

Stay tuned for HUD’s upcoming guidelines on purchase transactions and allowances for third-party costs to be covered by interested parties (realtors, lenders, etc.), which promise to further enhance the benefits available to reverse mortgage borrowers.

Ready to Build Your Dream Home with a Reverse Mortgage?

With the latest updates to HUD guidelines for reverse mortgages, building your dream home is now more accessible than ever. Whether you’re purchasing a new construction home in a tract development, contracting a builder for a custom home on your land, or navigating the updated documentation requirements, a reverse mortgage for purchase can be the perfect solution.

Start by calculating the required down payment with our Reverse Mortgage Purchase Calculator, and begin your journey toward your dream home today!

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Have a Question About Reverse Mortgages?

Look no further. Michael G. Branson, our CEO, brings a wealth of knowledge directly to you. With a robust 45-year tenure in mortgage banking and 20 years dedicated solely to reverse mortgages, he's the expert you want on your side.

Post your question in the comments below and anticipate a personalized response from Mr. Branson himself, typically within one business day. He's here to illuminate all angles of reverse mortgages, ensuring you're equipped with the knowledge to make informed decisions. Take this opportunity to gain insights from a seasoned professional.

22 Comments on this Article

Wilf H.
February 16th, 2024

My wife and I are both over 65 (I am 70, and she is 68). We own a mortgage free home. We want to build a new home, move into it, and rent out our existing home.

We have been told that we can get a reverse mortgage on our existing home but that if we move out, we will have to pay out that mortgage immediately. We can only get a reverse mortgage on the new home once we have lived there for six months.

Can I get a reverse mortgage on the new home immediately as it is being built or as soon as it is completed? Also, what would the cost of obtaining a reverse mortgage be?
Reply to Wilf
- Michael Branson
  February 16th, 2024
  
  Hi Wilf,
  It is true that if you get the reverse mortgage on your current home and then move out, the loan would become due and payable at that time.
  However, there is no 6-month occupancy requirement before you can get a reverse mortgage if you purchase a new home. It is tricky with a home you build, though, in that the final certificate of occupancy must be issued, and you must have moved your permanent place or residency to the new home before it is eligible.
  The cost to get the new home varies based on where the property is located, rates at the time, the value of the home, and the value of the loans at the time.
  Reply to Michael
Barbara S.
October 20th, 2022

Hello Arlo,

We built our own home last year, county does not require certificate of occupancy. We are told to get a COS before we can get a reverse mortgage. How do we get one?
Reply to Barbara
- Michael Branson
  October 20th, 2022
  
  Hello Barbara,
  
  In that case you need to just send us the final signed off permits. We will do our research with the public works or the building department for the appropriate city or county to verify that there is no Certificate of Occupancy (COO) issued. The appraiser would also comment on the completion of the home. You will be OK with those items in lieu of the COO that is not issued in your area.
  Reply to Michael
Linda I.
August 9th, 2021

My husband and I wholly own our home (in very good condition) valued at approx. $350,000. This home has become too large for us. We would like to self-contract a new smaller home. During our working lives we were sub-contractors. We are well versed in all areas of home construction. Is it possible to receive reverse mortgage funds from our current home to build a new smaller 'green' home?
Reply to Linda
- Michael Branson
  August 10th, 2021
  
  Hello Linda,
  
  You can use the funds from a reverse mortgage for any purpose you choose but if I am reading your question correctly, I would not advise it for the purpose you describe. Let me explain.
  The loan must remain on your primary residence. If you build a second home or a rental home and continue to live in the home with the reverse mortgage, you are fine and are still in compliance with the terms of your reverse mortgage.
  If you later rent the home on which you have the reverse mortgage, that would be a breach of the loan terms and the lender would call the Note due and payable and if you did not pay the loan off at that time, you would risk foreclosure. If you planned on moving into the new location after it was built, I still would not recommend using the reverse mortgage as the costs of the loan are too high to be used for interim financing.
  The reverse mortgage is meant to be used as the last loan you will every need. The costs of the Mortgage Insurance and all other costs are front-end loaded and to use the loan for just one year or a little longer for construction purposes would be extremely expensive.
  Reply to Michael
Scott
January 25th, 2021

Is it possible to roll a construction loan into a reverse mortgage (after getting the c.o.o.)? What expenses are involved in doing this?
Reply to Scott
- Michael Branson
  January 25th, 2021
  
  Hello Scott,
  If you are living in the home and the Certificate of Occupancy has been issued, as long as you and the property qualify, the property would be eligible to refinance the existing construction loan a reverse mortgage as your permanent loan.
  The costs would be the same as any other refinance and vary based on the area in which the property is located and the HUD Mortgage Insurance cost (which is the single largest fee on any reverse mortgage) would be based on 2% of the home's value.
  Reply to Michael
Barbara S.
October 18th, 2020

We are building our own home and we are not in city limits that don't give you CO how do we get reverse mortgage after it is complete.
We had a reverse mortgage before and lived in it for a year and then got reverse mortgage and did not have one. What do we do if no one will give us one?
We did all electric, plumbing and everything on that home and got reverse mortgage a year later...

Reply to Barbara
- Michael Branson
  October 20th, 2020
  
  Hello Barbara,
  The main difference is on a new construction home.
  
  On a new construction home, you need to get the certificate of occupancy (CO) whenever the residence is in an area where one is available.
  If you are in a place where the city/county will not issue a CO, then you need to have the final signed off permits and a letter from the building agency that supervises your location that they do not issue CO's in your location.
  Also, if you are doing the work yourself on this home as well, there may be a requirement that you provide evidence that you have the proper credentials to perform some elements that typically require licensed contractors (i.e. electrical, plumbing, structural, etc.) or the home may not be eligible for reverse mortgage financing.
  Reply to Michael
Aubree
September 8th, 2019

My mom has a reverse mortgage but needs to move in with us soon due to illness. If she sells her home, can she use reverse mortgage option to build a new home on our property? Or does she have to own the land?
Reply to Aubree
- Michael Branson
  September 8th, 2019
  
  Hello Aubree,
  
  Your mom would have to own the property in order to obtain a reverse mortgage as well as the fact that the home would have to be existing and completed. The reverse mortgage is not eligible for construction purposes.
  Reply to Michael
GERALD H.
July 23rd, 2019

I live in an over 55 community and the builder had to turn control over to us because his 7 years was up in the declaration. The problem is that he failed to keep his permits active and never finished the last 5 lots and we cannot get reverse mortgages because we are considered an incomplete development. How do we force him to complete the project or get our status changed? The development is in Massachusetts.
Reply to GERALD
- Michael Branson
  July 23rd, 2019
  
  Hello Gerald,
  
  I honestly cannot tell you what legal remedy you may have to force completion, for that information you need to speak with a real estate attorney in your area.
  I can tell you that therefore HUD requires certain projects to be approved before they will authorize insuring any loans on any of the units contained within the projects.
  If the project is one that requires a HUD approval (I am assuming this is a condominium project as HUD does not approve the project for single family units) but is not approvable by HUD, then there is no way to change the status short of bringing the project up to HUD requirements and getting HUD to approve the project.
  Short of that, it will not be eligible for the reverse mortgage program for the HUD-insured loan and at this time, I know of no other private program that would accept it for the same reasons.
  Reply to Michael
Allan J.
May 30th, 2019

This question is for a new home reverse mortgage. I have a closing date, but my plantations shutters will not be ready to install till two weeks after the closing date. Can I still close and have that included in the closing? I also wanted to know will the assessor be able to give me the correct assessment knowing that the shutters are included in the total price of the home. Thank you.
Reply to Allan
- Michael Branson
  May 30th, 2019
  
  Hello Allan,
  
  The loan cannot close by HUD rules if the certificate of occupancy (CO) has not been issued by the government entity responsible for issuing them in the area where the home is located (usually county or city).
  I have never heard of a CO being held up for shutters. The appraiser also issues a final inspection for the lender. If the appraiser must do a reinspection of the home for completion because the property was not finished at the time of the original appraisal, the appraiser may or may not consider the home complete with the shutters installed.
  I cannot honestly tell you what the appraiser will or will not do in this instance, it would depend entirely upon their determination as to what the total effect on value the unfinished treatments have and whether or not they considered them when they determined a value in the first place I would imagine.
  
  The appraiser may not have given any additional value to the shutters in the first place and in that case, would most likely not withhold a completion for window treatments, even costly ones. If none of the sales comparisons had similar treatments and your home's value was not adjusted for this upgrade, it may be a moot point but only the appraiser knows that at this point for sure.
  Reply to Michael
Jim L.
May 13th, 2019

How does a reverse mortgage work in purchasing a new home which will be built?
Reply to Jim
- Michael Branson
  May 13th, 2019
  
  Hi Jim,
  
  The reverse mortgage can only be used for homes that are completed and on which a Certificate of Occupancy (CO) has been issued. You cannot use a reverse mortgage to build a new home if you are the individual owning the lot and desire to build yourself.
  Even if the new home is the typical home builder type transaction, you must wait until the CO is issued before the loan can be closed and typically, before the appraisal is completed to avoid duplicate costs.
  So on new construction, most builders are looking to close the loan before they have a CO or the day it is issued and they need to understand that the loan cannot close until after this date and it will not be THAT day, it will be several days to a few weeks after in most instances.
  Reply to Michael
David W.
April 29th, 2019

I have lived in a mountain home I built for the last 17 years; it's valued at about $450K. I'm a 70 year old semi-retired contractor and I want a reverse to really retire. The house lacks a CO but only needs minor work (about $30K) to qualify. I can do the work but lack the funds for materials and subs. I can get a "temporary" CO that is good for a year. Will this qualify my property for a reverse so I can use funds from there to finance the work needed?
Reply to David
- Michael Branson
  April 29th, 2019
  
  Hello David,
  
  The home must have the certificate of occupancy already issued in order to meet HUD's requirements; it cannot be issued after closing. A temporary CO would not work because there would be no guarantee that the work would be completed afterwards and the permanent would be issued and the lender and HUD do not want to enforce further action later.
  You can take out a loan against the property and use the reverse mortgage to pay it off as long as the amount required to repay the loan does not exceed 60% of the Principal Limit and at a $450,000 value, $30,000 would not do so if there are no other loans on the property.
  The only problem with this is that if there are other issues that prevent you from being able to complete the reverse mortgage, you have to be sure you are comfortable with whatever financing you obtained to complete the construction if you are not able to pay it off for any reason later.
  Reply to Michael
Bill Plummer
February 26th, 2018

I would like to do a construction loan to a reverse mortgage. And one set of closing costs not two.Is there such a thing?
Reply to Bill
- Michael Branson
  February 26th, 2018
  
  Hi Bill,
  
  I am not aware of a construction to perm reverse mortgage program. HUD requires that the property be complete and the certificate of occupancy has been issued before they will do their loan and I am not aware of any private program that will allow this option either. If you get a construction loan from a bank we can certainly pay them off with the reverse mortgage as a regular revere mortgage for home refinance. Please feel free to call in or request your quote and one of our experts will be in touch with some details.
  Reply to Michael