The U.S. Department of Housing and Urban Development (HUD) recently announced the addition of the Home Equity Conversion Mortgage (HECM) for purchase. As part of the Housing and Economic Recovery Act of 2008, approved lenders now may offer senior home buyers a reverse mortgage to aid in the purchase of a new property. Traditional reverse mortgages are typically used by homeowners, aged 62 or older with significant home equity, to convert their home equity into cash while maintaining ownership of their homes. With the HECM for Purchase, the reverse mortgage proceeds combined with a large cash down payment, enable senior homeowners to purchase a new principal residence and not have to make monthly mortgage payments for as long as one homeowner remains in the home.
The opportunity for the HECM For Home Purchase is meant for borrowers who “want” to do this type of mortgage transaction rather than some of those that “need” to do a reverse mortgage and are considering down sizing. These borrowers will be couples or individuals that are not cash poor and have sufficient cash liquidity cover the difference between the purchase price and the loan amount after using the proceeds from an existing residence (owning a home previously is not required), closing expenses, and other costs associated with moving.
The HECM For Home Purchase program has similar characteristics to an FHA purchase with the following nuances:
- No seller concessions or credits
- No seller paid closing costs
- No gifts allowed
- No secondary financing
- No bridge loans
- More stringent requirements for condominium and town home and its association
- More stringent appraisal requirements & property condition standards
- Asset Seasoning – large deposits will require a letter of explanation and documentation to support that the funds are those of the applicant(s) only
Don’t expect the HECM For Home Purchase to be a primary driver for a senior’s decision to downsize. Most reverse mortgage originators expect that this product will make up 10-15% of their total production.