Are you planning to use a Reverse Mortgage to Purchase a Home? The following tips will be handy…
- The sale must be an “Arm’s Length Transaction” which means that you must be buying from a totally unrelated third party. Purchases involving family members are not eligible.
- Has the property recently sold? The property cannot have been sold less than 6 months prior to this sale as that would be “property flipping”. HUD does allow for some exceptions for HUD repos. Check with us BEFORE you make an offer.
- You will need to be able to satisfactorily verify and source all funds needed for the down payment and closing costs by using all pages of the bank statements from the account where the funds have been kept for the past 3 months. If you move funds from account to account, all funds must be traced, and any new funds must be sourced as well so it is much better to leave funds in a seasoned account.
- Gift funds from a family member are acceptable, but they will be sourced the same as your funds in #3 above. In addition, the transfer of the funds (both the giving and the receipt) must be verified. The donor will have to provide a letter that the funds are a gift (not a loan) that does not have to be repaid.
- You and the seller have the right to choose your service providers (title, closing agent), but unlike normal forward mortgage transactions, if the title and closing agent are not familiar and have not done numerous reverse mortgage transactions, they can seriously delay a transaction due to lack of experience.
We strongly recommend that you try to negotiate that your title and closing service be used. Some sellers will not allow this as their agents will push back if this is another source of income for their office, but it can really help to have experienced reverse mortgage professionals working on your loan. Check with your All Reverse Representative to determine the best services for your area.
- When you complete your counseling for a purchase reverse mortgage, lenders are a bit different on what addresses they require on the certificate based on the date of counseling and the purchase agreement. The best rule to follow is that if you do not have a contract written and accepted on a specific property at the time you complete your counseling, use your current address for your certificate.
If you have already entered into a contract to purchase, give the counselor the new property address for the address to appear on the certificate but be sure they have your correct current address to send you the completed certificate.
- We can issue you a letter which outlines the reverse mortgage process and is somewhat like a “Prequalification Letter” that many sellers require. However, without being able to complete all the HUD requirements that cannot be done until the contract and some of the work is completed, we cannot give a firm prequalification and to do so would not be ethical or legal.
Most sellers have accepted the letter and the loans have closed accordingly, but the seller is not required to accept it. The reverse mortgage is not like the forward loan and you can’t just run an “automated underwriting approval” for a borrower (which itself is only a contingent approval and is not guaranteed anyway but most sellers are not aware of this fact).
- If the appraiser notes that there are any necessary repairs, they must be completed by the seller, prior to the close of escrow. In other words, the buyer cannot accept a house in “as is” condition that does not meet HUD’s guidelines expecting to compete the repairs after the sale is closed. This is especially significant for borrowers looking to purchase foreclosures and short sales as many times banks and sellers will not complete some repairs.
- If the property you have chosen is a short sale (the lender has agreed to accept less than is owed on the existing lien), be sure you find out if there are any junior, or secondary liens. Just because the First Trust Deed Lender has agreed to accept less than the full amount owed does not mean that every other lender (if any) will and we have seen sales disintegrate at the last minute due to junior lien holders not approving the terms of the sale and the sellers not having any additional funds to pay the lien in full.
- Your property type is important as well. HUD will not insure a loan on a condominium unless the entire project is currently on their approved list. Many projects do not meet HUD’s parameters and some approvals can take many months to obtain as the HOA’s are forced to increase insurance coverage and they or the Condo Boards themselves are not willing to do so.
You need to be certain the condo project is approved BEFORE you make a deposit on a purchase. In addition to condominiums, HUD has restrictions on other property types and lenders may impose their own restrictions above and beyond HUD.
Manufactured homes, log homes, earth homes 3-4 unit properties may be allowed by HUD with certain requirements, but you may find it impossible to find an investor who will lend on this type of reverse mortgage purchase. If you are looking at a condominium or a unique property type, it is best to verify the property’s acceptance before you make your offer.
By keeping these items in mind when planning to use a reverse mortgage to purchase, you can save time and mistakes, making your transaction very smooth and easy!
What to do next:
Receive a detailed analysis from the purchase experts All Reverse Mortgage including closing costs, interest rates and program comparisons.
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