Affording That Dream Home …

Affording That Dream Home

We go through life first starting at our parents’ home, then maybe dorming, perhaps getting a condo or townhouse, then a starter home, then upgrading to have a yard or pool for the children, then perhaps thinking of downsizing or maybe finally getting that dream home.  But you don’t want to pay the high cost of that dream home in your relaxing years.  Is this you?

I met a couple who went through a variation of this.   In their case, they had a townhome and now with a preference for a one story, more privacy and more control over their home, they wanted a single family home with a yard. A yard where they could plant and lounge to their hearts’ desire.  The question was, how do they do this by using some of the proceeds from the sale of their home, without using up all their savings and retirement funds, and without paying excessive taxes?  Besides that, they were both retired and it was doubtful whether they could get a regular loan because there was no more employment income.   Banks want to be assured there is regular income so they can get paid. 

And remember, monies in the stock market and mutual funds are not guaranteed.  Secondly, if you pull them out, you will be facing taxes.  Speak with your accountant about this.

So what did we do?  They fell in love with a house that was more expensive than the house they were selling.  They had the money to pay in cash but understandably did not want to use up so much of their savings or have to pay hefty taxes on withdrawing from their retirement accounts. 

First, we sold their property.  Since the proceeds were not enough and used the proceeds to partially pay for a downpayment on their dream home.  The next step was to obtain a variation of a reverse mortgage.  It’s called a Home Equity Conversion Mortgage (“HECM”) loan for purchase.

In summary, they paid about 55% of the cost of the new property up front.  Then, they were responsible for monthly taxes and insurance (and HOA fees, if any). Period. That’s it. There is an underlying loan and the interest gets added to the loan balance, but they don’t have to pay it as long as they are alive and living in the home.  As long as they pay the taxes and insurance (and HOA fees, if any), they keep the house and can choose to NOT pay the underlying interest only loan). Neither the borrower or their estate is responsible for the loan balance over the market value of the home.

And THAT is how we got their DREAM HOME with an amazing backyard, space to relax, and in a great neighborhood with terrific neighbors.  And all this with payments less than at the townhome they sold. AND their payments were just the annual taxes and insurance.  They are paying LESS out of pocket then they did on their townhome.  

If they later want to move out or put the home in a will for the benefit of their family or charity, the loan will need to be paid back.  But not more than the market value of the home. The loan can be a fixed or variable rate.  But remember, they have the choice of paying the interest, or not.  No obligation to pay the interest.

What is the benefit of having such a loan?  For one, it frees up the money from the sale of your last home.  That money could be used to travel, remodel, give to children or grandchildren for school, to give to charity – it’s your choice!

Now to the background of the loan.

A Reverse Mortgage to PURCHASE a property? How does it work?

A reverse mortgage purchase allows seniors age 62 or older to buy a new home with HECM loan proceeds. The primary benefit to the senior is that the transaction only involves one set of closing costs versus buying a home and obtaining a reverse mortgage thereafter, which would incur two complete sets of closing costs. Created by the Housing and Economic Recovery Act of 2008, this program has been around for over a decade.  It became live on January 1, 2009. Qualified seniors have to follow all HECM requirements.  All of the basic rules apply in addition to some new rules and regulations.

What Are The Basics?

·       Can purchase existing 1 to 4 unit property

·       Property must be the principal residence

·       Once HECM purchase is complete, no additional liens are permitted (Lender in 1st position, HUD in silent 2nd)

·       Must provide monetary investment at closing from an allowable funding source, see below for details

·       Must occupy property within 60 days of closing

·       Newly constructed properties must have a certificate of occupancy issued by the time the Home Equity Conversion Mortgage purchase loan is insured by FHA ('endorsed').

There Are Some Differences Between A HECM For Purchase And A Traditional HECM For Seniors.

The major differences concern the property types that are eligible, the cash required at closing, the involvement of a Real Estate Agent in the loan process, the recommendation of a professional home inspection, and certain closing costs.

There are guidelines regarding which properties are eligible for a Reverse Mortgage.

Eligible Properties

Same as federally-insured reverse mortgages or Home Equity Conversion Mortgage loans.

Ineligible Properties

·       Cooperative units (co-ops)

·       Manufactured housing

·       Bed and breakfast properties, boarding houses

What Is The Monetary Investment Requirement?

At closing, HECM borrowers must provide funds which will be applied to satisfy the difference between the HECM principal limit and the sales price for the property, plus any HECM loan related fees that are not financed or offset by other allowable FHA funding sources. In other words, the proceeds from the reverse mortgage and any funds from the sale of the old property (or from the borrower’s savings) must be enough to purchase the new property outright. The difference between principal limit and sales price for the property also includes any HECM loan related fees that are not financed or offset by other allowable funding sources. Borrowers may provide larger investment amounts in order to retain a portion of HECM proceeds for future draws.

What are Allowable Funding Sources?

·       Their own money or money obtained from the sale of assets.

·       Withdrawals from borrower’s savings or retirement account are acceptable.

Lenders will be required to verify the source of all funds prior to closing. A verification of deposit, along with the most recent bank statement, may be used to verify savings and checking accounts. If there is a large increase in an account, or the account was opened recently, the lender must obtain a credible explanation of the source of those funds. Such documentation must be provided in the FHA case binder. Failure to provide the necessary documentation may result in a notice of rejection and delay of endorsement.

What Funding Sources Are Ineligible?

·       Loan discount points

·       Interest rate buydowns

·       Closing cost assistance

·       Builder incentives

·       Seller contributions or seller financing

·       Credit card advances

·       Secured or non-secured loans from another asset (car, home equity)

Borrowers may not obtain a bridge loan (also known as gap financing) or engage in other interim financing methods to meet the monetary investment requirement or payment of closing costs needed to complete the purchase transaction. This restriction includes subordinate liens, personal loans, cash withdrawals from credit cards, seller financing and any other lending commitment that cannot be satisfied at closing.

What Is The Role Of A Real Estate Agent?

The borrower should consider a written agreement – you should include contingencies for the sale of the senior’s previous home, the home inspection, appraisal, and so forth.

Selecting A Home For Purchase & Getting An Inspection

All borrowers are strongly encouraged by HUD to get a home inspection from a licensed professional home inspector (This is suggested but not required * I always suggest a professional home inspection)

·       Evaluates the physical condition: structure, construction, and mechanical systems

·       Identifies items that need to be repaired or replaced prior to the scheduled closing date

·       Estimates the remaining useful life of the major systems, equipment, structure, and finishes

·       Buyers should be at the inspection to ask questions about the condition and maintenance

All borrowers are strongly encouraged by HUD to get a home inspection from a licensed professional home inspector.

Required Repairs

·       Health and safety or structural integrity issues

·       Must be completed prior to closing by the seller

·       Include in a purchase agreement

·       Buyer cannot put any money into repairs before they own the home

Writing An Offer

·       Must state the offer is contingent on a satisfactory inspection conducted by a qualified inspector

·       The borrower may want an attorney to review the paperwork– increases costs but may be worth it

·       The client may cancel the transaction at any time prior to closing but this could affect earnest money deposit

Closing Costs

Standard HECM closing costs plus:

·       Recordation fees

·       Transfer taxes

·       Varies from state-to-state

Other Things You Should Know:

·       There is no three day right of rescission, unlike the traditional HECM. The three-day right of rescission period is not applicable to HECM for Purchase transactions. Therefore, all initial advances may be disbursed on the day of closing by the settlement agent. However, FHA encourages lenders to seek their counsel’s opinion to assure compliance with Federal or State laws.

·       Seller concessions are not applicable to reverse mortgages.

·       Existing HECM borrowers 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.

·       HUD-approved housing counseling agencies that have been approved to provide reverse mortgage counseling, must counsel those who anticipate using the HECM for Purchase option on all topics covered in this Mortgagee Letter and other HUD requirements and issuances.

·       Lenders are required to ensure the property, when used as collateral for the HECM, meets the following property requirements:

o   1) It is the borrower’s principal residence;

o   2) Construction is complete and a certificate of occupancy or its equivalent has been issued by the time the loan is insured by FHA ('endorsement') or by the lender's deadline, and

o   3) Any construction loan financing for the property, which will serve as the collateral for the HECM loan, is satisfied and the HECM liens will be in a first and second lien position and, at the time of closing, no other liens against the property exist.

Property Flipping

To avoid cases of property flipping, lenders must take steps to ensure that:

·       Only current owners of record may sell properties that will be financed using FHA-insured mortgages;

·       Any resale of a property may not occur 90 or fewer days from the last sale to be eligible for FHA financing; and

·       For resales that occur between 91 and 180 days where the new sales price exceeds 100% of the previous sales price, FHA will require additional documentation validating the property’s value.

Property Flipping Scams

If a lender suspects a senior has become a victim to a property flipping scam, the Processing and Underwriting Division of the local HOC should be contacted.

Some Final Thoughts

If you have any questions on this or other loan or options, please feel free to give me a call. We are here to help (310) 519-7670.