“Without the help and knowledge of Beth Paterson who first told me about the reverse mortgage to buy I would never have been able to get our beautiful new townhome, which my wife needs because of her mobility to navigate a lot of stairs.”
This was comment I received from Mike after they closed on their HECM for Purchase (H4P) and moved into their new home.
Mike and I had originally talked about 6 years ago when he and Carol were considering a reverse mortgage on the home they had lived for many years. For various reasons they decided to wait. We did talk periodically and I kept them informed of product changes. When Carol was having some issues navigating the stairs they had in their home they decided that it would be better to find a home without all the stairs. This is when I introduced them to option of using use the reverse mortgage to purchase the new home.
Their search ensued until they found a beautiful townhome not too far from their current home in Minnesota but easier for Carol to navigate now and into the future. Still interested in the idea of not having a mortgage payment, we met and discussed the H4P so they would have an understanding of the program. We also met with their real estate agent and the builder to educate them on how this unique option worked.
Like it did for Mike and Carol, the HECM Home Purchase Program provides financing to those who desire to re-size, move closer to children or purchase a new home without having mortgage payments.
The advantages of using a reverse mortgage to purchase a home:
- There are no monthly mortgage payments required (borrowers are responsible for paying property taxes, insurance and maintain the property).
- Preserves cash savings and investments rather than liquidating savings and investments to pay all cash for the home purchase.
- It is a way to leverage funds to make it possible to purchase a higher valued home.
- Provides financing so one can re-size to a lower maintenance home, one-level home, a home more suitable for aging in place, move to be closer to children or even purchase one’s “dream home.”
Keep in mind, a reverse mortgage is a mortgage but has special terms for those 62 and older. It offers the most flexibility on how the funds are received and when the loan needs to be repaid.
The steps to do purchase a home with the reverse mortgage are the same as with the regular reverse mortgage. However there are some unique points for this beneficial home purchase option that one needs to be aware.
- All borrowers going on title must be 62 years old or older.
- The properties that qualify must be residential and include:
- single family
- 1 to 4 family dwelling units if the borrower/owner resides in one unit
- FHA approved condos or manufactured homes that meet HUD’s standards
- To determine how much is available from the reverse mortgage for the purchase, we run our calculations on the lessor of the final appraised value, sales price, or FHA mortgage limit for a one-family residence (currently $625,500).
For example, if the purchase price is $250,000 and the appraised value is $275,000, we would use the $250,000. Or if the purchase price is $285,000 and the appraised value is $275,000, we use the $275,000.
- The proceeds available to the borrower are calculated the same way as with any reverse mortgage, having all the closing costs (origination and FHA MIP, reports, title and escrow/settlement fees) included in the loan so there are no out of pocket expenses other than the appraisal and potentially any inspections. The “Net Principal Limit” is the amount available to the borrower after costs.
Note: When I’m working with those exploring homes, I run several calculations at various possible home values so when the borrower and their real estate agent are looking for a home, they will have an idea of the home value and the cash the borrower will need at close.
- The borrower will need to have the difference between the Net Principal Limit and the purchase price available. For example:
If the purchase price and the appraised value is $275,000 and the Net Principal Limit is $165,000, the borrower will need $110,000* to purchase the $275,000 home.
Rather than using all reverse mortgage funds, more personal funds can be used for the purchase so the reverse mortgage can be set up with a line of credit option. (HECM LIBOR option only; the fixed rate requires you to pull all available funds at close and does not offer the line of credit option.)
For example, if a borrower has $150,000 in funds they want to use to purchase the same $275,000 home, they could combine their $100,000 with the $165,000 from the reverse mortgage proceeds to purchase the home and then have $40,000 in their reverse mortgage line of credit.
- The funds the borrowers use must be from cash on hand, cash from the sale, liquidation of assets or Gift funds (must meet HUD’s approved funding sources and source of funds needs to be documented).
The additional funds cannot come from Builder incentives, Seller financing, Seller contributions or concessions, any person or entity that financially benefits from the transaction or third party that is directly or indirectly reimbursed by any of the parties benefitting in the transaction or Credit Card advances, sweat equity, trade equity, rent credit. Purchasers cannot use loan discount points, interest rate buy downs, closing cost down payment assistance, gifts or personal property given by the seller or any other party involved in the transaction. Seller can pay their share of taxes and Home Owner Association fees if applicable.
- The borrower may choose any of the options/interest rate options:
- HECM Adjustable
- HECM Fixed
For calculation purposes our rates change every week. The rate cannot be confirmed until the week of closing. However, on the adjustable rate LIBOR we have a Principal Limit Rate Lock which means we can use the rate at the time of application or closing, whichever is the most favorable to the borrower. For the process of planning how much will be available to the borrower, I initially use the rate and amount of the program chosen at the time of application.
- Seller has to be the owner of record for 90 days prior to the date of the sales contract (based on when recorded). (This is to protect against property flipping.)
- Prior to completing an application HUD requires the Certification of Occupancy.
- The Original Purchase Contract or Certified Copy of the Purchase Contract is needed for underwriting.
- Counseling must be completed by a HUD approved HECM counseling agency that has been approved to provide reverse mortgage counseling. Minnesota requires that the counselor be located in Minnesota. We will provide a you a list of HUD approved counselors.
- The property must be livable at the time of closing. Any required repairs must be completed prior to closing by the seller – no repairs or repair set asides are allowed.
- Funds are provided at closing, as there is no rescission period.
- The new property has to be the primary residence and occupancy must happen within 60 days of closing.
- One’s existing home may be retained as rental property or if purchasing current home prior to the sale of existing home, income verification will be required to document the ability to maintain both properties. (This is prevent the practice of “buy and bail.”)
Using the reverse mortgage to finance the purchase of your new home may be your solution to meeting your goals without having a monthly mortgage payment.**
Like Mike and Carole, if you or someone you know are 62 or older and want to…
…move to a townhome so they don’t have to do the yard work
…move to a one-level home
…move closer to their children
…move to a larger home to have space for when their family comes to visit
The HECM for Purchase program may be your financing option!
*You may also need funds for property taxes, initial hazard insurance premium, home owner association dues, etc.
**Borrowers are still responsible for paying property taxes, hazard insurance, maintaining the home and abiding by the terms of the loan.
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© 2014 Beth Paterson, CRMP, Beth’s Reverse Mortgage Blog, 651-762-9648
This material may be re-posted provided it is re-posted in its entirety without modifications and includes the contact information, copyright information and the following link: http://wp.me/p4EUZQ-18l
Blog posts’ information is current as of date post published, program is subject to change in in the future. Contact us for current information, 651-762-9648.
This site or the information provided is not from, or approved by, HUD, FHA, or any US Government or Agency.
This site or information provided is not from, or approved by, HUD or FHA or any US Government Agency or Department. – See more at: http://rmsidac.com/#sthash.vv8MiYI8.dpuf
This site or information provided is not from, or approved by, HUD or FHA or any US Government Agency or Department. – See more at: http://rmsidac.com/#sthash.7ZcOk1EU.dpuf