If you are a realtor, you may not be familiar with reverse mortgages or the Home Equity Conversion Mortgage (“HECM”) program in particular. But with home purchases by seniors now starting to exceed first time buyers, this segment of house buyers is becoming a very important element of the realtor business. Remarkably, more home owners over 65 are upsizing versus downsizing. And there are now more home buyers over 65 than first time buyers.

While HECMs require substantial down payments of generally between 25%-55% (depending on the age of the youngest borrower and the interest rate chosen), the ability to use the current equity from the sale of an existing home along with a reverse mortgage makes the upgrading of home purchases for older buyers much more attractive.

Additionally, the option to defer monthly payments at any time, even for the life of the loan, and the much lower income qualifying requirements also makes the transaction very attractive to the older customer. It also brings more purchasers into the market than previous, especially for homes in the $450,000 to $679,650 range.

The HECM for Purchase has some unique requirements that can make the process frustrating unless you are well acquainted with the rules. Knowing these facts will ensure a smooth process and open an important market for the real estate professional.

Pre-approval on a HECM.

Just like in the forward mortgage world you can get a preapproval from a HECM for Purchase lender. The borrower cannot have an identified property or be in contract to purchase and have a Certificate of Occupancy. If the borrowers have already identified the property and have a COO, virtually all lenders prefer to take an application versus a complete preapproval.

HECM for Purchase Eligible Property Types.

Only properties where construction is completed are eligible for FHA insurance under the HECM for Purchase program.

Things to Know About a Sales Contract using a HECM for Purchase

  • The contract must include the FHA Amendatory Clause and Real Estate Certification.
  • The HECM for Purchase program in the past has been quite strict about any Seller Concessions or Credits to the purchaser that might indicate an inducement to enter a HECM transaction (which inducements are illegal under the HECM program). However in 2017 HUD indicated that it would permit Seller Concessions and Credits provided they were normal and consistent with local practices in similar transactions. Essentially, if title costs are generally paid with a credit from the seller, that practice may be acceptable to local HUD office.
  • HECM proceeds can only be used for real property.
  • The contract cannot contain any rent back options.
  • The agreement cannot include credits (except customary Seller Credits normal for the market and the nature of the transaction) or concessions from any party to the transaction (seller, lender, realtor, builder, etc.).
  • When the appraisal is ordered, the final contract including all pages and amendments must be provided to the appraiser.
  • The seller must pay for and complete all repairs. The seller also must pay for any final inspections associated with those repairs.  Unlike a traditional HECM refinance loan, all repairs must be completed by the sellerbefore theclose of a HECM for Purchase transaction.

FHA Amendatory Clause and Real Estate Certification.

The Amendatory Clause gives the buyers permission to back out of the transaction and receive their earnest money back if the property does not appraise for the amount they are buying the house for.  The Real Estate Certification states that the entirety of the sales agreement is disclosed in the earnest money agreement and accompanying addendums which are all provided to the lender.

Use of GAP Financing to Buy a Home with a HECM for Purchase.

Gap Financing is not permitted. HECM borrowers may not obtain interim financing to meet the 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.

Subordinated Liens

All existing liens must be satisfied at the HECM closing.

Financing the Equity in the HECM forPurchase with Debt Proceeds from Another Home or a Bridge Loan

This is not permitted. FHA has a rule which provides that there shall be no outstanding or unpaid obligations incurred by the HECM borrower in connection with the HECM transaction. Bridge loans and other interim financing methods associated with forward mortgage transactions are prohibited with HECMs unless the unpaid or outstanding obligation can be satisfied prior to or on the day of closing.

Seller Concessions

Until 2017, HUD did not permit Seller Concessions on HECM for Purchase loans. HUD has now indicated that “normal” Seller Concessions permitted by FHA in forward loan transactions may be accepted. However, HUD has left the matter vague and what costs may be paid by a Seller will likely depend on locality and the HUD office approving the loan.

Seller Financing

Never allowed with HECMs.

Rent back/Leaseback agreements with the seller?

Unlike a forward mortgage, when purchasing a new principal residence, the HECM borrower has 60 days to occupy the home.

HECMs can really help. Go download the eBrochure and watch the Video.

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