Can you have a contractor build a brand 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. However, there are several things that you really need to keep in mind when you undertake such an action and I feel that I would be remiss if I didn’t tell you some of those items.
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.
Firstly, you cannot even make application on the reverse mortgage until after the property is complete and the final certificate of occupancy (or its equivalent in your area if they do not use a COO) has been filed with the county, city or municipality responsible for building ordinances.
This means that the home must be 100% complete before the application can even be started for the reverse mortgage. You had stated that you wanted to finance the home upon completion (not the building of the home) so that would work, but you have to realize that the property will have to be built in its entirety before the reverse mortgage loan can even be started.
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.
We have done several reverse mortgages for borrowers under these circumstances but 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.
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. Unfortunately, since the loan cannot even begin until the builder has filed the certificate of occupancy, there is a bit of a delay before the loan can close or before the lender knows that the reverse mortgage meets all of HUD’s guidelines.
Borrowers engaging in this type of a transaction have to be certain they have an escape clause in the purchase agreement if the property does not meet HUD guidelines once the final documentation is collected (title policy, appraisal, etc.) or are prepared to purchase the home through other means such as a traditional forward mortgage or as an all cash transaction.
Secondly, there are the borrowers who own land and contract with a builder to build a home on the land they own. This can also be done but in addition to the things above that you need to remember (you cannot even begin the loan process until the Certificate of Occupancy has been filed), there are a few other distinct requirements on this program that you need to keep in mind.
For example, on the purchase of a new construction home from a builder, you determine the down payment by using the appraised value or the purchase price, whichever is less. However, this formula does not always work when you are buying land and building, or if you have owned the land for a while and are now building on it.
If you already own the land and have done so for over one year, and are now building on the land, then the reverse mortgage benefits will be determined by taking the value of the land as determined by the appraisal and adding all verifiable costs to construct the property; or the current appraised value of the completed home, whichever is less.
If you owned the property for less than one year, then you would use the land acquisition cost plus all verifiable costs to construct the dwelling and improvements; or the current appraised value, whichever is less.
Here again, if you build a home that does not meet HUD requirements, is so rural that there are no comparable sales for an appraiser to use for valuation or is so unique that it does not conform to other properties in the area, there is no guarantee in advance that the reverse mortgage will be approved.
The biggest things to remember are that you cannot begin the reverse mortgage process until after the new construction is complete. If you are building the home on land you already own, the value will be determined a bit differently.
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