The HECM for Purchase is a unique home loan program for homebuyers 62 and older. It allows them to purchase a primary residence with no required monthly mortgage payment. Title to the property is transferred to the new mortgagor, who will then occupy the property as a primary residence within 60 days of the closing. In the end, the HECM first and second liens must be the only liens against the property.
Prior to the passing of Housing and Economic Recovery Act of 2008, seniors did not have this alternative to buy a primary residence with HECM loan proceeds. On October 20, 2008, the Federal Housing Administration released Mortgagee Letter 2008-33, offering guidance on this new option.
While the HECM for Purchase program has been around for more than three years now, many still find it problematic or challenging. Most of the underwriting guidelines mirror those of traditional HECMs, but we have isolated a few key differences and common mistakes that need to be noted as you navigate through the HECM purchase process:
KEY DIFFERENCES
Seller-paid Closing Costs: The seller can only pay their prorated share of taxes or HOA dues, and fees that are required to be paid for the seller’s benefit.
Occupancy: Because HECMs are specifically designed for a principal residence, occupancy must be established within 60 days.
Timing: It would be wise to allow for a minimum of 60 days from application to closing. It is important to inform all
parties of this and extend the contract as necessary.
Monetary Investment: The Principal Limit Factors are the same, meaning the lender is lending the same amount toward a Purchase as to a traditional HECM. However, because the borrower has no equity in the home, they must bring a sourced monetary investment to closing.
Sales Contract: A certified copy of the sales contract with all exhibits and addenda will be required, prior to underwriting, as contracts are often amended multiple times.
New Construction: The home must
be 100 percent complete and the Certificate of Occupancy issued prior to the initial application, case number assignment and appraisal.
Can repairs be completed after closing? No. All repairs must be completed and paid for by the seller before closing the loan. No repair escrows will be established.
Current Residence: If the borrowers want to keep their existing home as a second home or investment, they need to document sufficient income to cover payments for both properties. That includes any principal, interest, taxes, insurance and HOA or condo dues, as well as the taxes, insurance and other property charges on the new property.
Property Address on Counseling Certificate: If there is no sales contract at the time of counseling, the borrower’s current address will suffice. Otherwise, the subject property may be on the counseling certificate. Because they are generally not living in the subject property, the mailing address on the loan application will be their current residence, while the subject property will be the home on which they have a sales contract. Borrower will then occupy the home within 60 days of closing.
Home Warrantee: On reverse mortgages, HUD does not allow the seller to purchase a home warrantee for the borrower.
COMMON MISTAKES
Missing or Non-allowable Fees: Pay close attention to the following fees that are commonly missed or overlooked: Owner’s Title Policy, Transfer Taxes and Homeowners Insurance. Review the purchase contract to see what additional fees will be required. Often, the sales contract is written to include seller contributions toward closing costs. This is not allowable under the HECM for Purchase program.
Missing Documents: Although the FHA Amendatory Clause is a required part of the contract, it’s very frequently overlooked. The disclosure “For your protection, get a home inspection” is required and also usually forgotten.
While the HECM for Purchase is a great solution for many seniors, the underwriting of this product requires
special care. In addition, the program is ever changing as the industry and HUD address remaining questions about purchase guidelines. We hope this summary has helped to clarify this loan program for you.
