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FHA Reverse Mortgages (HECMs) for Seniors (Purchase or Refinance)

March 21, 2017

 

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If you are a homeowner age 62 or older and have paid off your mortgage or paid down a considerable amount, and are currently living in the home, and are eligible, you may participate in FHA’s Home Equity Conversion Mortgage (HECM) program.  The HECM is FHA’s reverse mortgage program that enables you to withdraw some of the equity in your home with limitations or a single disbursement lump-sum payment at the time of mortgage closing.

You can also use a HECM to purchase a primary residence if you are able to use cash on hand to pay the difference between the HECM proceeds and the sales price plus closing costs for the property you are purchasing.

How the Program Works

There are many factors to consider before deciding whether a HECM is right for you.  To aid in this process, you must meet with a HECM counselor to discuss program eligibility requirements, financial implications and alternatives to obtaining a HECM and repaying the loan. Counselors will also discuss provisions for the mortgage becoming due and payable.  Upon the completion of HECM counseling, you should be able to make an independent, informed decision of whether this product will meet your specific needs.  You can search online for a HECM counselor or call PMC 800-385-3657 to have one of representatives help you.

General Requirements

  • You must be at least 62 years or older – Since reverse mortgages were designed to help seniors to afford to stay in their homes, this loan is only available to individuals in retirement age.
  • You must own your home – You must be on title of the home. You must also either own your home outright, or have a low enough remaining mortgage balance for the reverse mortgage loan to pay it off.
  • Your home must be your primary residence – Again, because this loan was meant to help seniors stay at home, borrowers must live in the home and cannot live elsewhere for more than 12 consecutive months.
  • You must complete a HECM counseling session with a HUD-approved counseling agency – The U.S. Department of Housing and Urban Development (HUD) provides a list of third party agencies for you to choose from. The purpose of this requirement is to inform the homeowner of all of their, and can evenly weigh the pros and cons of each.

Home Qualifications

  • Your home must be a 1-4 unit (multiple family) home with one unit occupied by you. – According to HUD, the most common type of property eligible for a reverse mortgage is a single family home. If your property is a multiple family home, then one of the units must be your primary residence.
  • Your home can be a manufactured home as long as it meets FHA requirements. – You can check the Federal Housing Administration’s (FHA) website for these requirements.
  • Your home can be a condominium if it is HUD-approved. – More information about HUD-approved condos can be found on their website or ask a PMC representative.

There are certain kinds of homes that simply do not qualify for a HECM loan. Vacation homes or secondary homes are not approved under reverse mortgage qualifications because they aren’t considered the homeowner’s primary residence. Also, if your home is on income-producing land such as a farm, then it is not eligible either.

Financial Qualifications

  • You must be financially able to pay your property taxes, insurance, and home maintenance and any applicable HOA fees. – One of the most important things to remember about reverse mortgages is that you are still responsible for paying your property taxes, home insurance, and any home fees like Home Owner’s Association (HOA) fees for the life of the loan. The benefits of reverse mortgages only apply if you comply with all loan terms, because otherwise you may be at risk of defaulting on the loan.
  • You cannot be delinquent on any federal debt.

These reverse mortgage qualifications and requirements may seem daunting, but don’t let that prevent you from applying.  A PMC representative can walk you through the whole process and let you know if there are other location-specific, property-specific, or borrower-specific requirements that you should be aware of.  Many homeowners have found that once they satisfy the requirements for reverse mortgages, the benefits of this unique loan helped them achieve a better quality of life.

HECM for Purchase Frequently Asked Questions

The FAQs on this page were written for lenders and housing counselors, however, seniors may find them helpful for an overview of the program.

What is HECM for Purchase?

HECM for Purchase allows seniors, age 62 or older, to purchase a new principal residence using loan proceeds from the reverse mortgage.  

What is the purpose of the program?

The program was designed to allow seniors to purchase a new principal residence and obtain a reverse mortgage within a single transaction. 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 if the HUD-1 Lines 303 and 603 do not match the figures from the Loan Amortization Schedule?

The HECM for Purchase closing will use many of the acceptable practices used for insuring forward mortgages. Because the HUD-1 Settlement Statement is the final statement, it will reflect final adjustments (e.g., adjustments for fuel, electricity, etc.) not captured on the Reverse Mortgage Loan Amortization Schedule.

Is the fixed interest rate eligible in a HECM for purchase loan?  Yes.  

What documentation should be used to document the 60-day physical requirement to occupy the property after closing?

The HECM security instrument requires the HECM mortgagor to establish a legitimate principal residence in the home. Lenders are encouraged to ensure the HECM mortgagor lives in the home prior to submitting the case binder for endorsement. Lenders may, but are not required to, obtain a letter from the HECM mortgagor stating he/she lives in the home.  

Are lenders required to submit form HUD 92541, Building Certification of Plans, Specifications & Site and 10-year warranties in the case binder?

No. Newly constructed properties must be 100% complete at the time of inspection and initial application.

Under what conditions may a senior cancel the purchase 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.  

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.  

Is this a HECM for purchase or a traditional HECM?

A senior purchases a principal residence using 100% seller financing, signs a HECM loan application the next day or shortly thereafter and meets all eligibility criteria for obtaining a HECM. Does the Federal Housing Administration (FHA) consider this transaction to be a traditional HECM or a HECM for purchase transaction?

This scenario describes a traditional HECM. Consistent with existing policy guidance, the HECM loan proceeds will satisfy a recorded lien that was created from the seller financing. Lenders may request a copy of the executed HUD-1 and warranty deed, or its equivalent, to ensure transfer of title to the prospective HECM mortgagor.  

Once a principal residence has been purchased using HECM loan proceeds, can the property serve as collateral for another secured loan?

Yes, only after the mortgage insurance certificate has been issued. Lenders are responsible for ensuring additional secured liens are subordinate to the HECM first and second liens. Such financing may not occur concurrently with the HECM closing.  

What property types are eligible?

Existing one-to-four unit properties where construction has been completed and the property is habitable as evidenced by local jurisdiction issuance of certificate of occupancy or its equivalent.  

Can a HECM for purchase be used to satisfy outstanding payment obligations associated with a land contract?

Yes, if the property will be used as collateral for the HECM and the mortgage will be held in fee simple, or on a leasehold under a lease for not less than 99 years which is renewable, or under a lease having the remaining period of not less than 50 years beyond the date of the 100th birthday of the youngest mortgagor.  

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

No. The lender may only take application once the Certificate of Occupancy or its equivalent has been issued.  

What property types are ineligible?  

  • Cooperative units
  • Newly constructed residences where a Certificate of Occupancy or its equivalent has not been issued by the appropriate local authority
  • 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 or homes that are installed or were occupied previously at another site or location.

Are set asides for property charges allowed (i.e., ground rent, tax, insurance, Homeowner Association fees, etc.)?

Yes. Mortgagors will continue to have the option of electing to have the lender withhold funds from their monthly payments or by charging such funds to the line of credit.  

Are set asides for repairs allowed?

To be eligible for federal insurance, the property must meet FHA minimum property requirements. All repairs to correct major property deficiencies that threaten the health and safety of the homeowner and/or jeopardize the soundness and security of the property must be completed by the seller prior to closing. Appraisers must complete the appraisal report as “Subject To” the completion of these repairs.

Major Property Deficiency Examples:

  • No running water
  • Leaking roof
  • No primary heating source
  • Inadequate electrical system (including lighting)
  • Inoperable doors and windows (inhibited ingress and egress)
  • State or local code violations

Is the Amendatory Clause required?

Yes. An appraisal is required for all HECM transactions, including purchase transactions. The execution of the Amendatory Clause does not negate federal and state mandates on providing a copy of the appraisal to the consumer.   

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.  

If the lender suspects the senior has become involved in a property flipping scam, who should be contacted?

If a lender suspects a senior has become a victim to a property flipping scam, contact the Processing and Underwriting Division of the local HOC. Complaints may also be reported to HUD’s Inspector at: HUD Office of Inspector General Hotline, GFI, 451 7th Street, SW Washington, DC 20410.

Are gifts an acceptable source of funding?

Prospective mortgagors may use their own money or money obtained from the sale of assets. The monetary investment requirement can also be met by the use of approved funding sources as defined in HUD Handbook 4155.1 REV-5, section 2-10, with the exception of the following funding sources which may not be used:

  • Sweat Equity
  • Trade Equity
  • Rent Credit
  • Cash or its equivalent, in whole or in part, from the following parties, before, during or after loan closing: – The seller or any other person or entity that financially benefits from the transactions, or – Any third party or entity that is reimbursed, directly or indirectly, by any of the parties described in the previous bullet. 

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.

How is the maximum claim amount and principal limit calculated?

For HECM purchase transactions only, the maximum claim amount will be the least of: 1) the appraised value; 2) sale price; or 3) FHA mortgage limit for a one family residence. The principal limit is determined by multiplying the maximum claim amount by the principal limit factor corresponding to the age of the youngest mortgagor, the expected interest rate and the initial MIP option that the borrower selects.  

Can prospective mortgagors 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.

Is seller financing permitted? No.  

Is the Real Estate Certification required? Yes.

When purchasing a new principal residence, if the HECM 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.

If the source of funds comes from the sale of the homeowner’s principal residence or other owned property, and the sale is occurring the same day as the closing on the HECM, can a copy of the executed HUD-1 and cashier’s or certified check, evidencing the sale, be used to verify the funding source? Yes. In addition to the HUD-1, a copy of the sales contract executed by all parties and a copy of the cashier’s or certified check bearing the name of the seller can be used to verify the funding source.  

Can prospective mortgagors obtain a secured or non-secured 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.

In lieu of providing a Verification of Deposit with the most recent bank statement, what other alternative documentation will FHA accept? Note: Full Doc vs. Alt Doc-one is a compliment for the other.

FHA will accept the two most recent, consecutive original bank statement(s), belonging to the borrower, which covers the most recent (three-month period) and previous month’s balance. Bank statements that are more than 120 days old prior to the closing date are not acceptable.   

Is the finance transaction of Loan A prohibited in this scenario?

Senior currently owns Home A. Senior wishes to purchase Home B. Senior borrows money (with Loan A) and uses Home A as collateral for Loan A, and uses the money from Loan A for a down payment on Home B. The remainder of the Purchase proceeds for Home B, which will be the senior’s principal residence, comes from a HECM for Purchase transaction.

Yes the transaction is prohibited. Although Loan A served as a secured loan tied to Home A, the money was applied toward the HECM for purchase transaction and would violate 24 CFR 206.32 (a) which provides that there shall be no outstanding or unpaid obligations incurred by the HECM mortgagor in connection with the HECM transaction.

Can the HECM mortgagor 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.

Does FHA have special eligibility requirements for first-time homebuyers?

No. FHA encourages all first-time homebuyers 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.  

For Reverse Mortgage Loan Amounts, see the State/County limits at https://entp.hud.gov/idapp/html/hicost1.cfm

PMC offers CPA/P&L/Balance Sheet and Personal/Business Bank Statement Loans (single account – using average monthly deposit averages-100% from personal and 50% from business) and also has other low doc home loans for 500+ FICO borrowers.

Our goal is to find you the best financing available to save  you the most money.  Ask the experts.  Email your scenario to info@pmccanhelp.com.

Make sure to visit our website:   www.pmccanhelp.com

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