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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.”
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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.
- 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
- 1-4 Units
- Fully completed (with certificate of occupancy or equivalent)
- Land contracts are acceptable
- 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
- 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
CostsWith a HECM for Purchase, all of the normal costs associated with selling and buying property apply as well as the normal reverse mortgage fees.
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