Buying your next new home using a Home Equity Conversion Mortgage: How does it work?

Buying your next new home using a Home Equity Conversion Mortgage: How does it work?

The Home Equity Conversion Mortgage for Purchase, or HECM for Purchase, allows seniors to buy a new home by putting a reverse mortgage on it. A reverse mortgage is a type of home equity loan that allows senior homeowners age 62 or older to borrow against the value of their homes. No repayment of the mortgage (principal or interest) is required until the borrower dies, or the house is sold.

The primary benefit to the senior when purchasing a home using a HECM for Purchase is that the transaction only involves one set of closing costs versus buying a home and obtaining a reverse mortgage thereafter, which would incur two complete sets of closing costs.

What are the basics to purchasing with a HECM?

First, the property being purchased must serve as a principal residence. The buyer must occupy property within 60 days of closing the purchase. Buyers can purchase existing 1 to 4-unit property. The property must also pass certain requirements, such as meeting all FHA standards and flood requirements.

Using a HECM for Purchase is easier today. A change implemented in October 2017 has made it easier to get a reverse mortgage on a new-construction home. Previously, a certificate of occupancy was required on the property at the time the loan application was submitted. Now, that paperwork may be provided any time up to when the loan closes, says Jenny Werwa, a spokeswoman for the National Reverse Mortgage Lenders Association.

Lastly, the buyer must provide monetary investment at closing from allowable funding source, see below for details.

There are some differences between a HECM for Purchase and a traditional HECM for seniors

A traditional HECM reverse mortgage is generally used to eliminate mortgage payments, provide a lump-sum cash out or set up a HECM line of credit to draw upon over time. The major difference with a HECM for Purchase involves the property types that are eligible, the cash required at closing, the involvement of a real estate agent in the loan process, the recommendation of a professional home inspection, and certain closing costs.

A reverse mortgage for purchase allows older Americans to buy a house that better suits their needs without dumping all their retirement assets into it, which would be the case in an all-cash transaction. It also lets them avoid dipping into their monthly fixed income, which would occur if they took out a traditional mortgage.

“The HECM for Purchase is not just a mortgage product. It extends the purchasing power for retirees,” says Corbin Swift, Senior Vice President of Production for Silver Leaf Mortgage. “It gives them more purchasing power if they don’t want to drain all their assets. It also gives them the luxury to buy a better home, to add all the upgrades they want, and to still have no mortgage payment.”

“There are no monthly mortgage payments as with a typical mortgage, Swift says. Instead, the loan must be repaid when the home is sold, or the borrower moves out or at end of life.” The repayment to the lender includes the amount borrowed, plus accumulated interest and lender advances. Any remaining equity belongs to the borrower, heirs or estate. Borrowers are still responsible for the payment of property taxes, homeowner’s insurance and any applicable HOA fees.

What is the monetary investment requirement?

At closing, the buyer must provide a monetary investment which will be applied to satisfy the difference between the HECM principal limit and the sales price for the property, plus any HECM loan related fees that are not financed or offset by other allowable FHA funding sources.

Explained in simpler terms, the buyer subtracts the amount of money the reverse mortgage can provide from the purchase price to determine how much money must be brought in as a down payment. For example, if the purchase price is $300,000 and the reverse mortgage can provide $180,000, the buyer must provide a down payment of $120,000 to purchase the house with a reverse mortgage.

The difference between principal limit and sales price for the property also includes any HECM reverse mortgage loan related fees that are not financed or offset by other allowable funding source. Keep in mind the buyer can always provide a larger investment amount for the purchase and retain a portion of HECM proceeds for future draws.

Ask the reverse mortgage broker to calculate how much of the home’s value can be accessed with a reverse mortgage. The reverse mortgage specialist will have a specialized calculator to make this determination.

What are allowable funding sources?

Again, the buyer will need to fund a portion of the purchase using their own money or money obtained from sale or liquidation of assets. Withdrawals from borrower’s savings or retirement account are acceptable.

The HECM reverse mortgage loan broker will be required to verify the source of all funds prior to closing. A verification of deposit, along with the most recent bank statement, may be used to verify savings and checking accounts. Failure to provide the necessary documentation may result in a notice of rejection and delay of approval on the loan.

What is the role of a real estate agent?

It is recommended to use a realtor that understands the HECM for Purchase. This is especially critical if there is a sale of a home and a purchase of another. The realtor should be involved in preparing a written sales agreement—you should include contingencies for the sale of the senior’s previous home, the home inspection, and a contingency for approval of HECM for Purchase loan.

A good realtor can help through every step of the process. It is strongly encouraged by HUD to get a home inspection from a licensed professional home inspector (This is suggested but not required) and a realtor can assist with this process. The inspector should evaluate the physical condition: structure, construction, and mechanical systems, and identify items that need to be repaired or replaced prior to the scheduled closing date. They may also estimate the remaining useful life of the major systems, equipment, structure, and finishes

Any pitfalls of a HECM for Purchase?

One drawback is that the buyer equity in the second home diminishes over time, says Kathy Muni, Senior VP of Lending Operations and reverse mortgage specialist at Silver Leaf Mortgage. The owner or the heirs/estate get whatever is left in equity after paying off the HECM reverse mortgage. In some cases, depending on the housing market, that may be nothing. “The pitfalls are the result of the benefit of using leverage to get a better home situation and having no payments,” Muni says, “As a result, you have a higher loan balance. You have accruing compound interest. It’s a trade-off.”

Other things you should consider:

  1. There is no three day right of rescission unlike a traditional HECM. The three-day right of rescission period is not applicable to HECM for Purchase transactions. Therefore, all initial advances may be disbursed on the day of closing by the settlement agent.
  2. Seller concessions generally not applicable to reverse mortgages.
  3. Existing HECM borrowers who participate in a HECM for Purchase transaction are ineligible for a reduction of the upfront mortgage insurance premium.

HUD-approved housing counseling agencies that have been approved to provide reverse mortgage counseling, must counsel those who anticipate using the HECM for Purchase option on all topics covered in this Mortgagee Letter and other HUD requirements and issuances.

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