What is a Purchase Reverse Mortgage?
Reverse Mortgage for Purchase allows seniors, age 62 or older, to purchase a new principal residence using loan proceeds from the HECM (Home Equity Conversion Mortgage)
What is the purpose of the program?
The Purchase Reverse Mortgage program was designed to allow seniors to purchase a new principal residence and obtain a reverse mortgage within a single transaction by eliminating the need for a second closing. The program was also designed to enable senior homeowners to relocate to other geographical areas to be closer to family members or downsize to homes that meet their physical needs, i.e., handrails, one level properties, ramps, wider doorways, etc.
What property types are eligible?
One to Four Unit Residential homes, PUD’s, and HUD Approved Condominiums (must be on HUD’s approved project list – https://entp.hud.gov/idapp/html/condlook.cfm)
Can a lender take application on a property that is under construction and not yet habitable?
Yes, but the Appraisal cannot be completed until the Certificate of Occupancy (or its equivalent) has been issued. Borrowers purchasing new construction homes will need to make sure that the closing date of the transaction is not to be immediately upon the issuance of the CO because that will not allow ample time to get the appraisal and underwriting completed prior to closing.
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/or lack a permanent foundation as required in HUD’s Permanent Foundations for Manufactured Housing Guide.
Are set asides for property charges (i.e., tax and insurance) allowed?
Are gifts an acceptable source of Down Payment?
Yes. Gift funds from an immediate Family member are an acceptable source of down payment.
What would be an “allowable FHA funding source” for gap financing of the equity portion?
A withdrawal from the mortgagor’s savings or retirement account would be an acceptable funding source.
Can prospective seniors apply credit card cash advances towards the required monetary investment or closing costs?
No. This would be a violation of 24 Code of Federal Regulations 206.32(a), which requires all outstanding obligations connected to the HECM transaction, purchase or otherwise, to be satisfied prior to or on the date of closing.
Are seller concessions allowed?
No. Seller concessions are applicable to forward mortgages only. Sellers are only permitted to pay for fees that are customary for the area to be a sellers expense and the Home Warranty.
Is seller financing permitted?
Is the Real Estate Certification required?
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.
Can prospective seniors obtain a secured or unsecured loan from another asset (i.e., car, home equity line of credit, or 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 prior to or on the day of closing.
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.
Under what conditions may a senior cancel the purchase reverse mortgage transaction?
The senior may decide to cancel the purchase transaction at any time prior to the date of closing. If the senior decides to cancel the transaction, he/she 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 right of rescission and Truth in Lending Act guidance.
Can the senior applicant participate in a rent back/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, there is an increased risk to FHA when the home is not occupied by the HECM mortgagor. Prior to closing, the HECM mortgagor and seller should agree to a date for physical occupancy of the property and the lender should confirm occupancy prior to their submission of the case binder to the local HOC for endorsement.
Are the mortgage proceeds paid to the seller through escrow?
The title company (settlement agent) is responsible for disbursing funds in accordance with State law.
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 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 had reason to know.
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 that offers pre-purchase counseling to educate themselves on the responsibilities of becoming a homeowner. Prior to signing a sales contract, FHA encourages a home inspection of all properties that will serve as collateral for HECM for purchase transactions. The inspection serves two purposes, to determine the magnitude, if any, of repairs and/or rehabilitation the home as well as helps the buyer to negotiate the purchase price in situation where a home requires repair or rehabilitation.
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 by using the lesser of the Home Value, Max Lending Limit set by HUD or Purchase Price. As of 2023 the HUD Lending Limit is $1,089,300.
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 that all required repairs on a purchase transaction be completed prior to closing and at the sole expense of the seller.
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