How Does The HECM/Reverse Mortgage for PURCHASE Work?
The change to the HECM program is not “new.” Regrettably, older homeowners are yet unaware of the benefits. The Housing and Economic Recovery Act of 2008 that was passed was the beginning of HECM for Purchase. Before this bill, it was difficult for homeowners in retirement to qualify for a new home if they wanted to relocate.
They had to be qualified to purchase a home via the traditional means, confirm their living in the home, and then refinance with a HECM if they wished.
You can see that it comprised two sets of closing costs for the new home and a period of waiting called “seasoning” which could be as long as a year. It was costly and time wasting.
Here is a fun fact
The number of American seniors will double between 2000 and 2030 with baby boomers turning 62 years old and becoming eligible for the Reverse mortgage program.
Purchasing a Home utilizing a HECM (One closing, and no waiting period)
It is now possible for homeowners to relocate and be closer to their family, reduce to a more manageable home/townhouse/condo, or upgrade to retirement dream home on the beach, golf course, or active adult community.
In a HECM for Purchase, the lender can still provide the same principal limit to the mortgagor. Meanwhile, the funds will be applied to the sales price of the mew home instead of handling the funds to the borrower.
HERE IS AN EXAMPLE OF HOW A HECM/REVERSE MORTGAGEFOR PURCHASE WORKS
According to Mary Ann’s age and estimated rate of interest, she is eligible for a principal limit factor of 60%. Recall, this is a portion of the home’s value that the lender can provide for the borrower. Mary Ann has just a home to be closer to the family for about $200,000 in profit from the sale. Therefore, she has more cash than she needs to purchase the new home using a HECM.
New home sales price is $300,000. Lender contributes 60% $180,000. Mary Ann comes to closing with $120,000+ closing costs.
She can keep the remaining $80,000 she didn’t need, and deposit it into her retirement savings.
Despite $120,000 being a substantial deposit, borrowers like Mary Ann are selling their existing homes. The diagram below reveals how Pamela upgraded to a larger home.
HECM for Purchase: Upgrade
It is not strange to see the HECM for Purchase used to UPGRADE to a bigger dream home; it is most likely that the homeowner will sell the existing home to move or DOWNSIZE to a more manageable home.
HECM for Purchase: Downsize
In this scenario, Mary Ann will be left with significant funds of over $160,000 that she can use to increase her retirement savings if she decides to downsize using a HECM for Purchase.
Here is a fun fact.
Less than 3% of seniors have a Reverse mortgage today and that percentage is expected to grow significantly.
HECM Reverse Mortgage Occupancy Requirements:
HECMs are purposely planned to be offered only for a borrower’s “Principal Residence.” This implies that the borrower will be required by the HUD to occupy the home within 60 days of closing.
Watch out if the home you want to purchase is viewed as “New Construction.” HUD procedures state that the home must be fully completed, and the Certificate of Occupancy or its corresponding document must be issued before the first application is taken.
Every lender has program procedures that could be added to the HUD procedures. These are referred to as “OVERLAYS,” and for the HECM for Purchase, one could come across constraints that will make becoming eligible for the HECM for Purchase more challenging.
The lender would want the sales contract to be executed fully and signed before the application will be taken. An original copy of the sales contract or one that has every page stamped “true and certified” is also required. Ensure that all exhibits are included.
Seller Paid Closing Costs:
Many mistakes are always made in this area. HUD is restricting about any seller concessions. This program option is a little complicated because it is rarely used.
Therefore, the step-by-step procedure for the perfect HECM for Purchase will help:
- Get HECM Advice: The Counselling Certificate should indicate the borrower’s current address, not the home in consideration because that could change closing.
- Decide if the applicant wants to keep the existing home: If the answer is “yes,” the borrower would need to be eligible based on their income to prove that they have enough funds to pay for the current home’s property charges and also the new home’s property charges.
- New Construction: Ensure that the home has a certificate of occupancy or a comparable designation.
- Negotiate the Sales Contract: Make sure that it has no seller concessions. FHA is very preventive regarding fees paid by the seller at closing
- Sign the Sales Contract: Keep a copy with the FHA amending clause and all exhibits to the loan officer.
- Apply for the HECM for Purchase: Note that it can take some time to process and underwrite.
- Attend Closing: Ensure to confirm the habitation of the Home within 60 days.
Mortgagee Letter 2008-33. HECM FOR PURCHASE
The Housing and Economic Recovery Act of 2008 (HERA) allows the HECM mortgagors to acquire a new principal residence with HECM loan earnings. Section 2122(a)(9) the HERA modifies section 255 of the National Housing Act to permit the Department of Housing and Urban Development (HUD) to cover the HECMs used for the purchase of a 1- to -4 family dwelling unit. Consequently, eligible mortgagors can buy a residence with HECM loan proceeds. HECM for purchase transactions that a FHA case number is assigned on or after January 1, 2009, must meet existing program requirements and the provisions of this Mortgage Letter.