HECM for Purchase loans have come a long way from relative obscurity when initially released in 2009 to gaining continued momentum today. With the recent introduction of HECM for Purchase transactions in Texas, they do not appear to be slowing down anytime soon. As experienced HECM for Purchase professionals know, it’s a niche product that comes with unique differences that separate it from both standard HECM transactions and forward purchase loans. Knowing the key differences and the questions to ask up front can result in a much smoother and faster loan process for all parties involved.

Step One: Information Gathering The first step of the process should be spent gathering information from the borrowers. The borrower should be questioned about their income, assets and other properties to determine whether they have the income to qualify, and if they have the funds necessary to bring to closing. “Borrowers who plan on retaining their existing residence and moving into their new home after they close will need to qualify for the ability to pay the mortgage on the retained residence as well as the taxes, insurance and HOA dues (if applicable) on both properties.”

Some examples of acceptable sources of funds are: -Savings or checking accounts -Gift letter and proof of donor’s ability to gift funds -Stocks, bonds and mutual funds -Retirement accounts, IRAs, 401(k)s -Real estate proceeds -Funds from life insurance policies that were not borrowed

Step Two: Setting Expectations Next, it’s important to make sure that all parties are aware that processing a HECM for Purchase is different in some aspects than forward purchase or standard HECM transactions. Because of the nuances, expected turn times for the entire process may be 30 to 45 days or longer, requiring a longer period to close in the Purchase contract.

Some key differences between HECM for Purchase transactions, forward and standard transactions are:

Repairs: FHA-required repairs must be completed at the seller’s expense. There are no repair escrows on HECM for Purchase transactions, so all repairs required to meet FHA guidelines must be completed prior to closing by the seller.

Seller and Lender Concessions: Unlike forward FHA loans, FHA does not allow any seller or lender concessions. This includes customary charges that are normally paid on behalf of the borrower/buyer by the seller, including fees such as owner’s title insurance, repair inspections, pest inspections, home warranties, etc. FHA views personal property in the same manner. Furnishings or other personal property that will be part of the sale must be reduced dollar for dollar from the sales price.

New Construction: For HECM for Purchase transactions, FHA requires the Certificate of Occupancy (CO) or equivalent from the local authority be issued prior to the loan application, counseling session or any services being ordered. Therefore, no part of the loan may proceed until this form is issued.

FHA Property Flipping Requirements: FHA flipping guidelines may restrict the sale of a property within certain timeframes. A temporary waiver has been established for forward FHA loans; however, that waiver does not apply to HECM transactions. A HECM borrower may not purchase a property that was acquired by the seller in the previous 90 days or less. For properties that were acquired between 91 days and 12 months prior, a second appraisal may be required. A second appraisal will always be required if the prior sale was between 91 and 180 days earlier and the current purchase price exceeds 100 percent of the prior purchase price.

Even though the process is similar for forward purchase transactions, some other things to keep in mind are:

Appraised Values: After the contract has been negotiated and a sales price has been agreed upon, it is difficult to go back to the buyers and sellers when the appraised value comes in lower or the appraised value is not supported. So, it is important to communicate to all parties—up front—the potential for changes in value/sales price, so there are no surprises during the processing and underwriting phase.

Occupancy: The real estate agent and loan officer should both be confident that the home to be purchased will in fact be the primary residence of the borrower once the sale is finalized in order to conform to HECM requirements and not face breach of terms from the outset. If there are any questions to this fact, all involved should be prepared for additional diligence in the loan review process.

Amendatory/Escape Clause: The Amendatory/Escape Clause should accompany the sales contract and be signed by all parties.

Inspections: The lender or appraiser may require additional inspections not opted for by the buyer/borrower.

Step Three: Lastly, once the loan is ready for closing and beyond, there are some final steps to take into account:

Proof of Funds: Sometimes, the amount of funds the borrower is required to bring to closing may increase once final fees are entered. (For example, estimated fees initially disclosed on the Good Faith Estimate may increase as a result of additional inspections that are requested by the borrower, appraiser or underwriter, or title insurance may increase due to a higher appraised value.)

At that point, additional proof of funds may be required if the amount they have to bring to closing is more than was originally documented.

Scheduling: HECM for Purchase borrowers are typically under a deadline to close, either due to the contract closing date requirement or a concurrent closing on an existing residence. So it’s important that deadlines be carefully observed during the process to ensure the closing can be scheduled on time. Additionally, keep in mind that closings scheduled for late in the day may delay funding to the following day if wires are sent after the bank’s cutoff times.

Occupancy Post-Closing: The lender must certify to HUD that the borrower will occupy the property as their primary residence within 60 days of closing, or the loan will be at risk for rejection of insurance. Many borrowers intend to delay move-in until a particular time after closing to allow time for renovation or for pre-planned trips. It is important to ensure the borrowers are aware of the timelines so they are not faced with any issues post-closing.

Keeping these things in mind, asking the appropriate questions and communicating expectations will ensure all parties involved have a great loan experience.