HECM For Purchase

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A reverse mortgage to purchase a property? How does it work?

A reverse mortgage purchase or HECM for purchase allows seniors age 62 or older to buy a new home with HECM loan proceeds. The primary benefit to the senior 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. Created by the Housing and Economic Recovery Act of 2008, this program became live on January 1, 2009. Qualified seniors must conform to all HECM requirements, all of the basic rules apply in addition to some new rules and regulations.

There are some differences between a HECM for Purchase and a Traditional HECM. The major differences concern 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.

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Common Questions About the HECM For Purchase Loan

What Is The Monetary Investment Requirement?

  • At closing, HECM borrowers 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. In other words, the proceeds from the reverse mortgage and any funds from the sale of the old property (or from the borrower’s savings) must be enough to purchase the new property outright. The difference between principal limit and sales price for the property also includes any HECM loan related fees that are not financed or offset by other allowable funding sources. Borrowers may provide larger investment amounts in order to retain a portion of HECM proceeds for future draws.

What Are Allowable Funding Sources?

  • Their own money or money obtained from the sale of assets.

  • Withdrawals from the borrower’s savings or retirement account are acceptable.

  • Credits (contributions) up to six percent of the sales price from an interested party, such as a seller, builder, developer, real estate agent, mortgagee, third-party originator, other parties, or a combination of parties with an interest in the transaction.

Lenders will be required to verify the source of all funds before closing. A verification of deposit, along with the most recent bank statement, may be used to verify savings and checking accounts. If there is a large increase in an account, or the account was opened recently, the lender must obtain a credible explanation of the source of those funds. Such documentation must be provided in the FHA case binder. Failure to provide the necessary documentation may result in a notice of rejection and delay of endorsement.

What Funding Sources Are Ineligible?

  • Closing cost assistance

  • Credit card advances

  • Secured or non-secured loans from another asset (car, home equity)

Borrowers may not obtain a bridge loan (also known as gap financing) or engage in other interim financing methods to meet the monetary investment requirement or payment of closing costs needed to complete the purchase transaction. This restriction includes subordinate liens, personal loans, cash withdrawals from credit cards, seller financing, and any other lending commitment that cannot be satisfied at closing.

HECM for Purchase Guidelines 

Eligible Properties

Same as federally-insured reverse mortgages or Home Equity Conversion Mortgage loans.

Ineligible Properties

Cooperative units

Manufactured homes (in certain circumstances they may be eligible)

Bed and breakfast properties, boarding houses

Selecting A Home For Purchase & Getting An Inspection

All seniors are strongly encouraged by HUD to get a home inspection from a licensed professional home inspector (This is suggested but not required)

-Evaluates the physical condition: structure, construction, and mechanical systems

-Identifies items that need to be repaired or replaced prior to the scheduled closing date

-Estimates the remaining useful life of the major systems, equipment, structure, and finishes

-Buyers should be at the inspection to ask questions about the condition and maintenance

Required Repairs

Health and safety or structural integrity issues

Must be completed prior to closing by the seller

Include in a purchase agreement

Buyer cannot put any money into repairs before they own the home

Writing An Offer

Must state offer contingent on a satisfactory inspection conducted by a qualified inspector

The borrower may want an attorney to review – increases costs but may be worth it

The client may cancel the transaction at any time prior to closing but this could affect earnest money deposit

Closing Costs

Standard HECM closing costs plus:

Recordation fees

Transfer taxes

Varies from state-to-state

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This is not an offer to enter into an agreement. Not all customers will qualify. Information, rates and programs are subject to change without notice. All products are subject to credit and property approval. Other restrictions and limitations may apply.

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