HECM for Purchase

Beginning on January 1, 2009, seniors became eligible to use a reverse mortgage to purchase a principal residence as part of HUD’s “HECM for Purchase Program.”

Definition (plain English)

HECM reverse mortgages are now available to seniors who would like to buy a new home if:

  • The youngest homeowner is age 62 or older
  • The purchased home will be 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 the 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 an existing home

Definition (formal)

HUD’s formal definition of the program, from the HUD Mortgagee Letter on October 10, 2008, is:

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 A (selling an existing home)

  • Bob Jones is 62 currently lives in a Chicago, Illinois in a home he has lived in for 10 years. The home was recently appraised for $250,000 and Bob is pretty confident he can sell it for that much. He still owes $50,000 on his 30-year mortgage so he has $200,000 in home equity.
  • Bob wants to move to Tampa, Florida and has found a $300,000 property on the bay that he likes.
  • If Bob sells his Chicago home and applies his $200,000 in home equity to buy the $300,000 Tampa property, he will be short $100,000. So he decides to use a HECM for Purchase to make up the $100,000 difference.
  • Bob knows that at age 62, he is eligible to borrow approximately $165,000 on the $300,000 Tampa property with the HECM 250 program.
  • So Bob buys the Tampa property using $200,000 from the sale of his Chicago home, $100,000 from the HECM for Purchase, and keeps $65,000 left over in the reverse mortgage credit line.
  • Bob now owns his $300,000 home and has no mortgage payments.

Example B (paying cash)

  • Mary Smith is 70 and lives in St. Paul, Minnesota. She is currently renting but wants to buy a new home. She has saved up $100,000 towards buying property.
  • The home Mary wants to buy is going to cost $250,000 so Mary is short $150,000.
  • Mary decides to take out a HECM for Purchase. At her age, she can borrow approximately $150,000 on a $250,000 home.
  • Taking the full $150,000 from the HECM for Purchase and $100,000 from her savings, Mary is able to buy the home.
  • Mary now owns her $250,000 home and has no mortgage payments.

Qualifications

Special restrictions:

  • If the homeowner is using cash (instead of the sale of your existing home) to make up the difference, that cash must be “seasoned” for 60 days.
  • Cash from a gift is not acceptable.
  • To prove that the homeowner has “eligible funds” for the closing, any of the following 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 the primary residence and may be:

  • 1-4 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 its equivalent
  • Boarding houses
  • Bed and breakfast establishments
  • Existing manufactured homes built before June 15, 1976
  • Existing manufactured homes built after June 15, 1976 that fail to conform to the manufactured home construction safety standards or lack a permanent foundation

What if the home needs repairing? Most repairs aren’t critical but major ones have to be taken care of before the transaction can close:

  • Critical health and safety and structural integrity issues must be repaired
  • Repairs must be completed prior to closing by the 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, all of the normal costs associated with selling and buying property apply as well as the normal reverse mortgage fees.

General Reverse Mortgage Questions

 

Below is a list of Frequently Asked Questions by category. 

Please review all basic information below.

·        Reverse Mortgages Explained

·        What is a Reverse Mortgage?

o       A reverse mortgage is a loan that enables senior homeowners, age 62 and older, to convert part of their home equity into tax-free* income. There are no monthly mortgage payments, title remains in the name of the senior homeowner(s) and the senior retains ownership until the loan becomes due. The loan becomes due when the last borrower(s) permanently leaves the home. The amount to be repaid will never exceed the appraised value of the home. Learn more about reverse mortgages.

·        What are some of the advantages of a Reverse Mortgage?

o       There are many advantages of a Reverse Mortgage:

§        Financial Independence – you will retain title and home ownership

§        Home Sweet Home – you can remain in your home

§        Tax-Free Cash – funds received from a reverse mortgage are not considered income and will not affect Social Security or Medicare benefits

§        Your Home, Your Cash – funds received can be used by you in any way you choose

§        No Monthly Mortgage Payments – there are no monthly mortgage payments and the loan does not become due until your home no longer becomes your permanent residence

·        What types of Reverse Mortgages are available?

o       There are 2 basic types of reverse mortgages available:

§        HECM – Insured by the U.S. Department of Housing and Urban Development (HUD) and widely available.

§        Proprietary or Jumbo - These are private loans with unique features that often benefit seniors with higher value homes and significant equity.

·        What is the most popular Reverse Mortgage?

o       The HECM is the most popular reverse mortgage as it generally offers a higher loan amount for lower valued homes.

·        Are reverse mortgage interest rates fixed or variable?

o       Reverse mortgage programs allow a borrower to choose a fixed or adjustable interest rate. Fixed programs have a fixed interest rate for the life of the loan. Adjustable programs offer the security of capped interest rates and often provide the highest amount of money to the borrower.

·        What can I expect when I start the Reverse Mortgage process?

o       Bankers Mortgage makes the reverse mortgage process as simple as possible by following our six step process. Below are the basics but to learn more details please refer to About Reverse Mortgages – The Process.

§        Step 1 – Get Educated with an Bankers Mortgage Specialist

§        Step 2 – Complete Independent Counseling

§        Step 3 – Review & Sign Application

§        Step 4 – Appraisal, Title & Services

§        Step 5 – Final Loan Documents

§        Step 6 – Receive Your Funds!

·        Qualifications

·        Can anyone qualify for a Reverse Mortgage?

o       No. Only seniors age 62 and older who own their own home may qualify.

·        Does my credit score or income (good or bad) affect my ability to qualify for a Reverse Mortgage?

o       No. There are no credit or income qualifications to qualify for a reverse mortgage.

·        Does my home have to be free and clear to qualify for a Reverse Mortgage?

o       No. A reverse mortgage can be used to pay off an existing mortgage or equity loan as long as there is enough equity built up in the home.

·        If I still have an existing mortgage on my home, can I still qualify for a Reverse Mortgage?

o       Yes. If you have a first and/or second mortgage on your home, you still may be able to qualify for a reverse mortgage. A portion of the funds that you would receive would be utilized to pay off any existing liens on your property.

·        What homes types are eligible for a Reverse Mortgage?

o       For a home to be eligible, it must be the primary residence of the senior homeowner age 62 or older. The following types of homes are eligible for a reverse mortgage:

§        Single Family

§        Condo

§        2-4 unit multi-family

§        Modular

§        Manufactured built after June 1976 (HECM product only)

§        Planned Unit Developments (PUD)

§        Mobile homes and Cooperatives are generally not eligible for a reverse mortgage.

·        If my home is in a living trust, is it still eligible for a Reverse Mortgage?

o       Yes. In most cases a homeowner who has put their home in a revocable living trust can usually take out a reverse mortgage. A review of the trust documents will be conducted by the reverse mortgage lender to determine if anything in the living trust would be unacceptable.

·        Can I take out a Reverse Mortgage on a second home?

o       No. Reverse mortgages can only be taken out on your primary residence.

·        Home Ownership and Retention

·        Does the lender own or take over the title of my home?

o       No. You will always retain ownership and title of your home until your home is no longer your permanent residence

·        Can the lender take my home away?

o       No. The borrower retains title and ownership of the home but, just like a first mortgage or home equity loan, the borrower must still pay property taxes, hazard insurance and maintain the home in a reasonable condition.

·        Can the lender take my home away if I outlive my Reverse Mortgage?

o       No. The borrower retains title and ownership of the home. Also, the loan does NOT become due for as long as the home remains the primary residence of the borrower, property taxes and hazard insurance are paid, and the residence is maintained in a reasonable condition.

·        Can I refinance my Reverse Mortgage?

o       Yes. Refinancing is an option and makes sense if the value of your home increases or interest rates decrease.

·        Calculations, Fees and Use of Funds

·        How much can I borrow and how is the amount determined?

o       The amount of your benefit is calculated based upon 4 factors:

§        Age of youngest borrower

§        Current Home Value

§        Location of Home

§        Current Interest Rate

o       Your Bankers Mortgage Specialist will run the necessary analysis and explain to you have these factors work in determining your Reverse Mortgage benefits.

·        Can you explain the fees involved with a Reverse Mortgage?

o       Typical reverse mortgage costs include the following and can be financed into the loan, resulting in no immediate burden to the borrowers.

§        FHA Insurance – protects the terms of your loan

§        Origination – covers the cost of processing your loan, your representative, coordinators, processors, management support and overhead

§        3rd Party Costs – includes appraisal, title, escrow, flood cert, credit and signing agent. These costs are only incurred as directly billed by third parties without any markup.

o       The lender is also required to provide you with the Total Annual Loan Cost (TALC) disclosure which is required by the Federal Reserve Board. The TALC displays the total transaction costs over the projected life of the loan, which will allow your parents to see all costs related to the reverse mortgage.

·        How are funds from a Reverse Mortgage distributed?

o       There are a wide range of payment options with a reverse mortgage to meet your financial needs.

§        Monthly Supplement – you can receive a monthly distribution in the form of a check or direct deposit

§        Lump Sum – you can receive available funds all at once at the closing of your loan

§        Line of Credit – available funds can be set aside for you to draw upon when you need additional money. Plus, the unused portion of your Line of Credit continues to grow at a rate .5% HIGHER than the interest rate

§        Any combination of the above – added flexibility allows you to mix and match the above options

·        Are the funds I receive taxable?

o       No. The funds you receive are tax-free.

·        How can I use the money I get from a Reverse Mortgage?

o       The options for how you can use the money available are unlimited and unrestricted. After paying off any existing liens against the home, here is a small sampling of the many ways to enjoy your Reverse Mortgage Benefits:

§        Eliminate your monthly mortgage payments

§        Supplement your monthly income

§        Improve your home

§        Pay off credit card debts or other bills

§        Setup a Line of Credit for Unexpected expenses

§        Pay for medical expenses or supplemental insurance

§        Travel or enjoy leisure activities

§        Gifts to family

·        Repayment

·        Are there any penalties if I decide to pay back the loan early?

o       No. You can pay back the loan at any time without being charged any fees.  

·        Are monthly payments required with a Reverse Mortgage?

o       No. You’re never required to make any monthly payments until the loan becomes due. However, you are responsible for payment of taxes, insurance and general home maintenance.  

·        When will the Reverse Mortgage become due and payable?

o       Reverse mortgages become due and payable when one or more of the following occurs:

§        The last surviving borrower(s) permanently moves out of the home, sells the home or passes away

§        The last surviving borrower fails to live in the home for 12 consecutive months

§        The borrower(s) fail to pay property taxes or hazard insurance

§        The borrower(s) fail to maintain the home within a reasonable condition  

·        When the loan becomes due, what has to be repaid?

o       When a loan becomes due and payable, the reverse mortgage principal, interest charges, monthly service fees and other accrued fees are paid from sale of the house or other assets of the estate. The amount owed can never exceed the current value of the home.  

·        Who takes care of the loan repayment when I pass? Will my children ever be responsible for repayment of my Reverse Mortgage?

o       Reverse mortgages are non-recourse loans, which means the bank can never come after any person or estate for repayment of the loan. The bank can only receive payment of the loan from the value of the home. When the home passes onto heirs, the reverse mortgage will have to be resolved either through selling or refinancing the home.  

·        Can I still leave my home to my heirs if I have a Reverse Mortgage?

o       Yes. If the borrower sells the home or the home no longer is used as their primary residence, the borrower or estate must repay the lender for the cash received from the reverse mortgage, plus interest, monthly service fees and any other accrued costs. Any remaining equity belongs to the borrower or heirs.  

·        If I leave my home to my heirs, do they have to sell my house to repay the loan?

o       No. Repayment may be accomplished by refinancing the reverse mortgage, selling the home or through the use of other assets to pay off the balance. The amount due can never exceed the value of the home when the loan becomes due and payable.