ARLO presenting reverse mortgage purchase FAQ

Q.

What is a Purchase Reverse Mortgage?

A Purchase Reverse Mortgage allows seniors aged 62 or older to buy a new primary residence using the loan proceeds from a Home Equity Conversion Mortgage (HECM).
Q.

What is the purpose of the program?

The purpose of the Purchase Reverse Mortgage program is to allow seniors to buy a new primary residence and secure a reverse mortgage in a single transaction, thus removing the need for a second closing.  Additionally, the program aims to assist senior homeowners in relocating to different areas to be closer to family members or to downsize to homes that better fit their physical needs, such as properties with handrails, single-level layouts, ramps, and wider doorways.
Q.

What property types are eligible?

One to Four Unit Residential homes, PUD, and HUD Approved Condominiums (must be on HUD’s approved project list – https://entp.hud.gov/idapp/html/condlook.cfm)
Q.

Can a lender take an application on a property that is under construction and not yet habitable?

Yes, a lender can accept an application for a property under construction that is not yet habitable.  However, the appraisal process cannot proceed until the Certificate of Occupancy (or its equivalent) is issued.  For new construction homes, it is crucial to schedule the closing date sufficiently after receiving the Certificate of Occupancy.  This timing ensures there is enough time to complete the appraisal and underwriting processes before closing.
Q.

What property types are ineligible?

  • Cooperative units;
  • Non-HUD Approved Condominiums
  • Boarding houses;
  • Bed and breakfast establishments;
  • Existing manufactured homes built before June 15, 1976, and
  • Existing manufactured homes built after June 15, 1976, that fail to conform to the Manufactured Home Construction Safety Standards, as evidenced by affixed certification labels (e.g., data plate and HUD certification label) and lack a permanent foundation as required in HUD’s Permanent Foundations for Manufactured Housing Guide.
Q.

Are set aside for property charges (i.e., tax and insurance) allowed?

Yes.
Q.

Are gifts an acceptable source of Down Payment?

Yes.  Gift funds from an immediate family member are an acceptable source of down payment.
Q.

What would be an “allowable FHA funding source” for gap financing of the equity portion?

An “allowable FHA funding source” for gap financing of the equity portion includes withdrawals from the borrower’s savings or retirement accounts.  Starting in 2024, HUD has expanded the funding options for purchase reverse mortgages.  Now, in addition to the HECM loan, borrowers can use other sources such as premium pricing, gifts, disaster relief grants, and employer assistance to finance their part of the purchase.
Q.

Can prospective seniors apply credit card cash advances toward the required monetary investment or closing costs?

No.  This would violate 24 Code of Federal Regulations 206.32(a), which requires all outstanding obligations connected to the HECM transaction, purchase or otherwise, to be satisfied before or on the closing date.
Q.

Are seller concessions allowed?

YES.  In 2024, sellers can now use a 6% contribution to help buyers with a reverse mortgage purchase.  This money can be used for various expenses, including origination fees, closing costs like credit reports and appraisals, prepaid items, discount points, lowering interest rates, and the initial payment for mortgage insurance.  However, this contribution cannot be used to cover counseling fees.
Q.

Is seller financing permitted?

No
Q.

Is the Real Estate Certification required?

Yes
Q.

When purchasing a new primary residence, if the Purchase Reverse Mortgage proceeds do not cover the sales price, can part or all of the property’s indebtedness be subordinated behind the first and second HECM liens if the existing lien holder is willing to execute a subordinate agreement?

No.  All existing liens must be satisfied at the HECM closing.
Q.

Can prospective seniors obtain a secured or unsecured loan from another asset (i.e., car, home equity line of credit, investment property, or second home) to satisfy the monetary investment or closing costs?

No.  Consistent with existing policy, bridge loans and other interim financing methods associated with HECM transactions are prohibited unless the unpaid or outstanding obligation can be satisfied before or on the closing day.
Q.

Does the lender need to obtain a credit report for non-borrowing spouses?

Not always.  If the borrower can meet the Residual Income guidelines on their own, then we do not have to run a credit report on the Non-Borrowing Spouse.
Q.

Under what conditions may a senior cancel the purchase reverse mortgage transaction?

The senior may decide to cancel the purchase transaction at any time before the date of closing.  If the senior cancels the transaction, they must notify all parties in writing.  Where earnest money has been provided, the senior should review the sales contract to determine if the earnest money is refundable.  The Federal Reserve Board of Governors should be contacted for guidance on the right of rescission and the Truth in Lending Act.
Q.

Can the senior applicant participate in a rent/leaseback agreement with the seller?

No.  When purchasing a new principal residence, the HECM mortgagor has 60 days to occupy the home.  Unlike a forward mortgage, FHA has an increased risk when the HECM mortgagor does not occupy the home.  Before closing, the HECM mortgagor and seller should agree to a date for physical occupancy of the property, and the lender should confirm occupancy before submitting the case binder to the local HOC for endorsement.
Q.

Are the mortgage proceeds paid to the seller through escrow?

The title company (settlement agent) is responsible for disbursing funds according to state law.
Q.

Are there special procedures for foreclosure homes that will serve as collateral for a purchase transaction?

No.  FHA has sufficient valuation guidelines related to comparable sales and declining markets to address the resale of foreclosed properties.  HUD has imposed a standard of accountability to which lenders, sponsor lenders, and loan correspondents will be held.  It is the same as the standard used to impose civil money penalties for program violations, and that standard is one of knowing (actual knowledge) or having reason to know.
Q.

Does FHA have special eligibility requirements for first-time home buyers?

No.  FHA encourages all first-time home buyers to meet with a reverse mortgage counselor who offers pre-purchase counseling to educate themselves on the responsibilities of becoming a homeowner.  Before signing a sales contract, FHA encourages a home inspection of all properties that will serve as collateral for HECM purchase transactions.  The inspection serves two purposes: to determine the home’s magnitude, if any, of repairs and rehabilitation and to help the buyer negotiate the purchase price when a home requires repair or rehabilitation.
Q.

If the property appraises for more than the purchase price, will the lender use this amount to determine the reverse mortgage amount?

No.  The loan amount is determined using the lesser of the Home Value, the maximum lending Limit set by HUD, or the purchase price.  As of 2024, the HUD Lending limit is $1,209,750.
Q.

If the property requires repairs to meet minimum FHA guidelines, can the seller credit the buyer for those repairs or hold money back in escrow?

No.  HUD guidelines require all required repairs on a purchase transaction to be completed before closing and at the seller’s sole expense.

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