Can You Purchase A Home With A Reverse Mortgage?
October 31st, 2008
- HUD Explains How To Buy a Home With A Reverse Mortgage
- Reverse Mortgage Could Help You Downsize to One of “Best Places to Retire”
- Can we rent out our house that has a reverse mortgage?
- Reverse Mortgages and Title Insurance
- Reverse Mortgages and Title Insurance
We usually think of reverse mortgages as a form of refinancing, something used to extract equity from a home which has been owned for many years and secures little if any debt.
But you can also use a reverse mortgage to purchase real estate: In basic terms you first qualify for a reverse mortgage, you then pick a property and at closing the title is assigned to the lender. At the end of the day you get a home with no required monthly payments for principal or interest, the lender gets a secured property and HUD gets insurance premiums.
As the FHA explains:
“The Federal Housing Administration (FHA) defines “HECM for Purchase” as 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.”
Notice that HUD is not saying you can buy a home with no money down and finance it with an FHA reverse mortgage. As one example of how a model transaction might work, HUD offers this illustration:
A home is bought for $300,000. The principal limit for the HECM is $199,500. Loans fees amount to $15,500 so a loan valued at $184,000 is available. The borrower must put up the balance, $116,000 in this case.
Here are some of the program basics:
Property: You can get a one to four-unit property providing you occupy one as your prime residence.
Condition: Only properties where construction is completed are eligible for FHA reverse mortgages.
Loan proceeds. A HUD reverse mortgage may be used to “satisfy outstanding payment obligations associated with a land contract, contract for deed or other similar purchasing arrangements that will ensure the property, which will be used as collateral for the HECM, meets FHA’s title requirements. Those requirements, as provided in section 255(b)(4) of the National Housing Act and implemented in the HECM regulations at 24 CFR 206.45, provide, in part, that the HECM must be on real estate held in fee simple, or on a leasehold under a lease for not less than 99 years which is renewable, or under a lease having a remaining period of not less than 50 years beyond the date of the 100th birthday of the youngest mortgagor.”
Ineligible Property Types
___Newly constructed principal residence where a Certificate of Occupancy or its equivalent has not been issued by the appropriate local authority;
___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 (e.g. data plate and HUD certification label) and/or lack a permanent foundation as required in HUD’s Permanent Foundations for Manufactured Housing Guide.
Refinancing and Existing Upfront Mortgage Insurance Premium (MIP)
“The HECM refinance authority is only applicable when the property that serves as collateral for FHA-insurance remains the same. Therefore, existing HECM mortgagors who participate in a HECM for Purchase transaction are ineligible for a reduction of the upfront MIP and lenders must enter the transaction into FHA Connection as a new HECM.”
For the full mortgagee letter from HUD, please press here. For specific information please speak with reverse mortgage lenders.
As always with a reverse mortgage, please speak with an attorney who specializes in elder law before signing any paperwork.