A Reverse Mortgage Can Be Used To Buy A House
Tuesday, November 11, 2008
posted by N. Sioris


The long awaited revisions to the FHA insured HECM reverse mortgage program include the ability for senior borrowers to use a HECM reverse mortgage in order to purchase a home.

Until the passage of the new addendum, the only way to purchase a home and still make use of a reverse mortgage was to complete two separate transactions. First you would have to purchase the new home with either all cash or qualify for a regular purchase money mortgage.

After you closed on the purchase of the new home, you would then do a second transaction with a reverse mortgage lender in order to either eliminate the payments and pay off the other brand new mortgage that you just closed on, or to reimburse yourself for the cash that you had to lay out for the purchase.

With the passage of the new revisions, you can now do just one transaction. This not only simplifies and expedites the process, but it saves you from paying double closing costs on two mortgage transactions. The effective target date for purchase money HECM reverse mortgages to be available is January, 2009.


Here Is The Way It Works:

Senior homeowners qualify for a specific amount of money based upon the youngest borrower's age and the APPRAISED value of the to be purchased property. This by the way, is a liberal departure from the standard procedure used for most loans. Typically, the maximum loan amount is determined by the LOWER of either the appraised value or the purchase price. By allowing the appraised value of the property to be used to determine the maximum loan amount, FHA/HUD is allowing borrowers that are purchasing a home at below market prices to be able to benefit from the higher appraised value and not have to contribute as much of their own cash to the transaction.


Here is an example of how the math would work for a senior couple that are both 72 years old, based on current interest rates.

Assume that the purchase price and the appraised value for the new home are both $300,000. On a monthly HECM reverse mortgage loan this couple would be eligible for a $186,790.00. Their required contribution to the transaction would be $113,210.00.

For this same example let's assume that this couple is downsizing to a smaller single level home in a retirement community. They have sold their large two-story family home where they raised their kids and lived for the last 25 years. The sale price of the family home was $425,000.00 and they had a mortgage balance of $75,000.00 on that home. After real estate sale costs and paying off the existing mortgage balance they netted $320,250.00.

After making the down payment on the new purchase of $113,210.00 this couple pockets $207,040.00 from the sale of their previous home and have ZERO house payment on the new home in the retirement community. They have freed up the accumulated equity in the large family home in a lump sum and moved into a new smaller home, mortgage free. Wow! What a way to enjoy retirement. No house payment and a big chunk of extra cash to boot.



The Eligibility Requirements Are:


Homeowners must occupy their new home within 60 days of closing the transaction, and the new home must be their primary residence.

Newly constructed homes must be fully completed and have a final certificate of occupancy from the appropriate local authority.

Flipping of properties is prohibited. Which means that only current owners of record may sell properties that will be financed using FHA HECM reverse mortgages. Any resale of a property may not occur 90 or fewer days from the last sale.

The down payment requirement or cash to close must be verified and cannot be borrowed funds. The borrower's funds must be from cash on hand or cash from a sale or liquidation of the borrower's assets. Borrower's may not obtain a bridge loan or "gap" financing to meet the down payment requirements.

HUD reverse mortgage counseling specific to home purchase reverse mortgages, must be completed prior to an application for loan approval.

There is no three day right of rescission period for reverse mortgage borrowers for purchase transactions.


Properties that do not qualify for a HECM purchase reverse mortgage loan are:


Cooperative Units
New construction residences where a Certificate of Occupancy or its equivalent has not been issued by the appropriate local authority.
Boarding houses
Bed and Breakfast Establishments
Existing manufactured homes built before June 15,1976 and
Existing manufactured homes built after June 15,1976 that fail to conform to the Manufactured Home Construction Safety Standards, as evidenced by affixed certification labels and or lack of HUD approved permanent foundation requirements