HECM For Purchase

Definition

HECM reverse mortgages can be used to buy a new home if

  • The youngest homeowner is  62 or older
  • The purchased home will be their primary residence
  • The purchased home will be occupied within 60 days of closing
  • No mortgage loan other than the HECM can be used to buy this purchased home
  • The difference between the purchase price of the home and the HECM proceeds must be paid in cash or from the sale of the existing home

From the HUD Mortgagee Letter from October 10, 2008:

The HECM for Purchase is a real estate purchase where title to the property is transferred to the HECM mortgagor, which the mortgagor will occupy as a principal residence, and, at the time of closing, the HECM first and second liens will be the only liens against the property. HECM mortgagors must occupy the property within 60 days from the date of closing. Lenders are required to ensure all outstanding or unpaid obligations incurred by the prospective mortgagor, in connection with the HECM transaction, are satisfied at closing.

Example of selling an existing home

  • Kevin Miller, aged 62 has a home in the Midwest recently appraised for $250,000. He still owes $50,000 on his mortgage, meaning his home equity is now $200,000
  • Kevin finds a home in Florida for $300,000 he wants to move to
  • With Kevin’s age at 62 he knows he is eligible to borrow about $165,000 on the $300,000 Florida property using the HECM 250 program
  • Kevin then buys the Florida property using $200,000 from the sale of his Midwest home, $100,000 from the HECM for Purchase and keeps the $65,000 left over in the reverse mortgage credit line
  • Kevin owns his Florida home and does not have to pay any mortgage payments

Example of paying cash

  • Kate Jones, aged 70 lives rents a home in Illinois but has saved $100,000 to buy a property
  • Kate finds a home that is $250,000 so she is short $150,000.
  • Kate decides that a HECM for Purchase is her best option. At her older age, she can borrow around $150,000 on a $250,000 home.
  • Taking the full $150,000 and her $100,000 savings, Kate buys the home
  • Kate owns her home and has no mortgage payments

Special Restrictions:

  • If the homeowner is using cash to make up the difference if they are short, that cash must be “seasoned” for at least 60 days
  • If the cash is a gift, it is not acceptable
  • There must be proof that the homeowner has “eligible funds” for the closing, and any of these documents can be provided:
  • Letter of Verification of Deposit from the bank
  • Proof of liquidation of retirement assets
  • Deed of Sale
  • HUD1 home sale statement

The property must be a primary residence and can be:

  • 1 to 4 units
  • Condominiums
  • Fully completed (with certificate of occupancy or equivalent)
  • Land Contracts are acceptable

Ineligible property types include:

  • Cooperatives
  • Homes without a Certificate of Occupancy or equivalent
  • Boarding house
  • Bed and Breakfast establishments
  • Existing manufactured homes built before June 15, 1976
  • Existing manufactured homes built after June 15, 1976 that to not conform to the manufactured home construction safety standards or lack a permanent foundation

If repairs need to be done on the home, major repairs must be taken care of before the transaction can close:

  • Critical health and safety and structural integrity issues must be repaird
  • Repairs must be completed prior to closing by seller
  • The buyer can not pay for any repairs before they own the home
  • The repairs must be included in the purchase agreement

Costs

With a HECM for Purchase, the typical costs with selling and buying a property apply as well as the normal reverse mortgage fees.