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.
HUD Policies on Reverse Mortgages for New Construction
In the past, HUD would not allow a prospective reverse mortgage borrower to even start their reverse mortgage loan until after the completion of the new construction property, and the Certificate of Occupancy (COO) had been issued.
This was especially problematic for borrowers who needed to retire construction financing soon after completion and needed to know their loan would meet guidelines and for those buying a home from a builder who wanted to close the loan soon after completion and had to be told that the loan process would not even start until the home was completed.
HUD has made previous changes to the program to allow the loan to begin sooner, but with the new changes, there are ways for borrowers to close in areas where local government agencies do not issue Certificates of Occupancy.
Home Building Options for Reverse Mortgage Financing
There are a couple of different ways that a contractor can build a home for the end buyer, so I’ll try to touch briefly on each.
The first and probably most popular way that most people have a home built is when they contract with a builder who is building a home that is part of a tract or even a single speculative property (or spec home) that the builder is building for sale to a potential homeowner.
The one thing you want to remember is that the builder will want to sell and close the home as quickly as possible after the home is completed.
Under HUD’s current guidelines, borrowers can begin the loan before the home is completed, and once the property is completed and the COO has been issued, the reverse mortgage can be closed. This was made possible by previous changes made by HUD, which now allows borrowers to begin their loan before the build is complete.
Custom Home Construction on Owned Land
Secondly, some borrowers own land and contract with a builder to build a home on the land they own. This is probably nowhere near as common, but it does occur.
In this case, the landowner may finance the build with their own funds or with a construction loan, but either way, the homeowner may wish to either replace all or a portion of the funds they used to build the home with permanent financing or take out the construction loan that is usually a short-term loan.
HUD’s New Inspections Process for Areas Without COO Issuance
The further enhancement that HUD just announced is that borrowers living in areas where there are no agencies that issue COO, borrowers can work with a lender to arrange for inspections at footing, framing, and final by ICC Certified (International Code Council) RCI (Residential Combination Inspectors) or CI (Combination Inspectors) which will allow the borrower to proceed with a reverse mortgage when the property is complete.
In some instances, in lieu of the three inspections by the individuals with the certifications mentioned, inspections may be accepted by a disinterested 3rd party who is a registered architect, a structural engineer, or a contractor who has met the licensing and bonding requirements of the state in which the property is located. You would obviously need to know at those stages that you were in an area where there is no COO available and that those inspections would be needed, but the option is there.
Updated HUD Guidelines for Reverse Mortgages: Closing and Considerations
HUD always required a property that was under construction at the time of application to be complete and a COO to be issued for the loan to close (even after they relaxed their guidelines to allow the loan to begin before the COO was issued). Under the new guidelines, the COO must still be issued in areas where they are available, but in areas where no COOs are not issued by any government municipality, a final inspection must be issued by the local authority with jurisdiction over the property or an ICC certified RCI or CI.
Other considerations exist for homes that have existed for less than 1 year and have never been occupied. If that is the case you find yourself in, then be sure to discuss your circumstances with your lender.
On a typical forward or traditional mortgage, it is not uncommon for the loan to be in process and ready to close as soon as the builder finishes. With these changes, reverse mortgages are now just as viable for use with new construction as forward loans. And it’s not part of this topic, but stay tuned for HUD’s new guidelines on purchase transactions!
As a little bit of a tease, HUD has begun to allow for third-party costs to be paid by interested parties (realtors, lenders, etc.), so we will be announcing that shortly – what the limitations are and how it will work—all good news for reverse mortgage borrowers.
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