Key Notes from NRMLA - National Reverse Mortgage Lenders Association
Link to Purchase Reverse Mortgage Calculator
10/29/2008
Many
senior buyers and real estate agents have been waiting for HUD to issue
the Mortgagee Letter which outlines the guidelines for the Home Equity
Conversion Mortgage (HECM or “Heck-um”) reverse mortgage
program for purchase transactions. The Bill that Congress passed
and was signed by President Bush on July 30, 2008, H. R. 3221, among
other things now allows this program to include purchase transactions
for the first time (but could not be implemented until HUD announced
the parameters of the program). This is exciting news to Senior
Americans who have wanted to purchase a new residence but could not pay
for the home in full and did not qualify under conventional
underwriting standards. This includes those who wish to downsize,
move closer to family and friends, move into senior communities for the
activities or amenities they offer, or those who find that their
current home simply does not meet their needs any longer such as those
needing wider halls for wheel chair access and those needing single
story homes that currently reside in multiple story properties.
HUD just issued their Mortgagee Letter (#2008-33)
which outlines many features and explains how they intend to implement
this feature. The purchase feature will not go into effect until
January 1, 2009 and will contain many additional requirements.
While not all of the improvements we had hoped to see based on the Bill
are included in the purchase program (specifically the inclusion of
cooperative units), HUD did a very good job of getting this program out
and did make it “borrower friendly” for bona fide senior
purchasers. In a nutshell, HUD put as many safeguards in place as
they felt they needed to avoid fraud and abuses while allowing for as
many different property types and transactions as they felt they could
under the guidelines.
HUD has
instituted some guidelines and some procedures to protect against
property flipping, but aside from the cooperative units that will be
offered sooner or later as a result of H.R. 3221 (and it is unclear if
it will be for purchase and refinance or just refinance or under what
guidelines at this point), it appears that the property requirements
have not changed. HUD only clarified that if the homes are new
construction they must be completed and the Certificate of Occupancy
must have been issued. If an existing HECM holder refinances
their HECM to a new HECM, then they do not need to pay the entire
up-front mortgage insurance premium again, just the difference if any
from the old lending limit to the new one if it has gone up. This
is not true on the purchase of a new property. It is then a new
transaction and the up-front mortgage insurance premium is due.
Just like any HUD loan, all funds required to close the transaction
must be verified. HUD will not allow any type of secondary
financing to close the purchase of these loans.
Borrowers
with existing properties with HECM loans who refinance those HECM loans
do not have to pay the entire up-front mortgage insurance premium a
second time, but rather on the difference (if any) between the old
amount and the new amount if there has been an increase in the lending
limit between the times of the two loans. However, borrowers with
existing HECM loans who sell their homes and purchase using a HECM loan
will be required to pay the entire up-front mortgage insurance premium
on the new purchase transaction. HUD determines the amount of
money the senior borrowers need to bring into the transaction based on
the appraised value. This is a departure from the normal
guideline of the appraised value or sales price, whichever is
less. HUD has decided to allow borrowers who are purchasing a
home at below market prices to be able to benefit from the higher
appraised value and not have to bring in as much cash to close the
transaction. They must believe the safeguard against abuses with
the anti-flipping rules have insulated them enough to allow this
departure from normal valuation guidelines, but whatever their specific
reasoning this allows seniors to gain access to homes with less money
down under many circumstances.
A
few things to remember are that the borrower has to have the funds
required for down payment, they cannot come in part or entirely from a
bridge loan, loans from credit cards or other secondary
financing. HUD does allow prospective HECM borrowers to look to
other FHA allowable funding sources for a portion or all of the
necessary down payments such as family, close friends and non-profit
organizations (that are not seller financed). Borrowers must be
counseled with regard to the purchase program specifically including
all the enhancements covered herein.
Before
this, many senior borrowers who could not qualify for loans under
conventional underwriting standards or who did not want to take all the
equity from their existing dwelling and use it to purchase a new
property, simply had to stay where they were. This enhancement
allows them to use the HECM program to purchase a property, not pay
100% cash for the home without having to qualify for and pay monthly
mortgage payments, and gives them options they never had. As of
January 1, 2009, seniors who have the desire, now have the vehicle to
purchase a home which might better suit their needs or their lifestyle,
without qualification, without ever making a monthly mortgage payment
and allowing them to hang on to some of the money they would otherwise
have had to put down on the property…sounds like a great start
on the new year for seniors!
Reverse
Mortgage for purchase transactions, for which the FHA case number is
assigned on or after January 1, 2009, must satisfy existing program
requirements and the provisions of this Mortgagee Letter.
HECM borrowers
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.
Only properties where construction is completed, as defined in Mortgagee Letter 2007-06, are eligible.
Ineligible
property types for Purchase Reverse Mortgages include: cooperative
units; newly constructed principal residence where a Certificate of
Occupancy or its equivalent has not been issued by the appropriate
local authority; boarding houses; 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.
To
avoid cases of property flipping, lenders must take steps to ensure
that: a) only current owners of record may sell properties that will be
financed using FHA-insured mortgages; b) any resale of a property may
not occur 90 or fewer days from the last sale to be eligible for FHA
financing; and c) 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.
Existing
Reverse Mortgage borrowers who participate in a HECM for Purchase
Reverse Mortgages are ineligible for a reduction of the upfront MIP and
lenders must enter the transaction into FHA Connection as a new HECM.
At
closing, Reverse Mortgage borrowers must provide a monetary
investment 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.
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.
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.
HUD-approved
housing counseling agencies that have been approved to provide reverse
mortgage counseling, must counsel those who anticipate using the HECM
for Purchase Reverse Mortgage Option on all topics covered in this
Mortgagee Letter and other HUD requirements and issuances.
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.
Lenders
are required to ensure the property, when used as collateral for the
HECM, meets the following property requirements: 1) Is the
borrower's principal residence; 2) Construction is complete and a
certificate of occupancy or its equivalent has been issued; 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.
Instructions
on how to enter HECM for Purchase transactions into FHA Connection and
Insurance Accounting Collection System will be provided in a separate
instruction.
Official Mortgagee Letter
ASSISTANT SECRETARY FOR HOUSING- FEDERAL HOUSING COMMISSIONER
October 20, 2008
MORTGAGEE LETTER 2008-33 TO: ALL APPROVED MORTGAGEES ALL HUD-APPROVED HOUSING COUNSELING AGENCIES
SUBJECT: Home Equity Conversion Mortgage (HECM) for Purchase Program
The Housing and Economic Recovery Act of 2008 (HERA) provides HECM
mortgagors with the opportunity to purchase a new principal residence
with HECM loan proceeds. Section 2122(a)(9) of HERA amends section 255
of the National Housing Act to authorize the Department of Housing and
Urban Development (HUD) to insure HECMs used for the purchase of a 1-
to 4-family dwelling unit. Accordingly, eligible mortgagors now have
the opportunity to purchase a principal residence with HECM loan
proceeds. HECM for purchase transactions, for which the FHA case number
is assigned on or after January 1, 2009, must satisfy existing program
requirements and the provisions of this Mortgagee Letter.
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.
Eligible Property Types
Only
properties where construction is completed, as defined in Mortgagee
Letter 2007-06, are eligible for FHA insurance under the HECM for
Purchase program. Loan proceeds 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
The following property types are ineligible for FHA insurance under the HECM for Purchase program:
Cooperative units;
Newly
constructed principal residence where a Certificate of Occupancy or its
equivalent has no been issued by the appropriate local authority;
Boarding houses;
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
Property Flipping
Prospective
mortgagors should be alert to efforts to coerce them into obtaining a
reverse mortgage as part of a purchase contractual obligation, or
purchasing a distressed home in need of substantial repairs but being
sold at or above market rate.
As
such, HECM lenders must take steps to ensure that: a) only current
owners of record may sell properties that will be financed using
FHA-insured mortgages; b) any resale of a property may not occur
90 or fewer days from the last sale to be eligible for FHA financing; and c) 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. Lenders providing HECM financing for purchase
transactions must comply with guidance provided in Mortgagee Letter
2006-14.
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.
Monetary Investment
Consistent
with existing policy, the maximum claim amount and principal limit will
continue to be calculated in accordance HECM regulations at 24 CFR
206.3, HUD Handbook 4235.1 REV-1, and applicable MLs. At closing, HECM
mortgagors must provide a monetary investment 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.
HECM
mortgagors may choose to provide a larger investment amount in order to
retain a portion of the available HECM proceeds for future draws.
Required Investment Examples
Example #1
Example #2
Example #3
Appraised Value/MCA*$300,000 Sales price $300,000
Appraised Value/MCA*$300,000 Sales price $325,000
Appraised Value/MCA*$300,000 Sales price $280,000
Principal Limit** ------------$199,500
Principal Limit** --------------- $199,500
Principal Limit** -----------------$199,500
Minus Loan Fees----------- $ 15,500
Minus Loan Fees --------------$ 15,500
Minus Loan Fees -------------- $ 15,500
Avail. HECM proceeds---- $184,000
Avail. HECM proceeds---------$184,000
Avail. HECM proceeds ---------$184,000
Req. Investment----------- $116,000
Req. Investment --------------$141,000
Req. Investment --------------- $ 96,000
* Appraised Value/MCA is defined as the lesser of the appraised value or the FHA the HECM mortgagor.
** Assumes the age of the youngest HECM mortgage interest rate. In each
example above, loan fees are required that loan fees be deducted the
required monetary investment Funding Sources
Maximum
claim amount and is used to determine the principal limit which is the
national mortgage limit. The principal limit is the maximum amount
available to mortgagor is 67 and a principal limit factor of .665
for a 5% expected average deducted from the principal limit of the
HECM. However, it is not from HECM proceeds. The mortgagor may pay loan
fees as part of and use all HECM proceeds toward the purchase
transaction. cash on hand or cash from the sale or liquidation of the
mortgagor’s verify the source of all funds prior to closing.
A verification of bank statement, may be used to verify savings and
checking accounts. or the account was opened recently, the lender must
obtain a of those funds. Such documentation must be provided in the FHA
case documentation may result in a notice of rejection and delay of
requirements at 24 CFR 206.32(a), HECM mortgagors may as “gap
financing”) or engage in other interim financing methods to or
payment of closing costs needed to complete the purchase subordinate
liens, personal loans, cash withdrawals from credit lending commitment
that cannot be satisfied at closing.
HECM mortgagors must use assets for the required monetary investment. Verification of Funding Sources
Lenders
will be required to deposit, along with the most recent If there is a
large increase in an account, credible explanation of the source
binder. Failure to provide the necessary endorsement. Gap Financing
Consistent
with existing regulatory not obtain a bridge loan (also known meet the
monetary investment requirement transaction. This restriction includes
cards, seller financing and any other
Gap Financing Example
A prospective HECM mortgagor completes the required reverse mortgage
counseling and receives an estimate stating the required monetary
investment could be $25,000. The prospective HECM mortgagor has $20,000
in liquid assets but is short the remaining $5,000. The prospective
HECM mortgagor cannot take $5,000 from a credit card or obtain interim
financing in order to deposit the money into their banking account in
anticipation of being required to bring this amount to closing.
However, the prospective HECM mortgagor may obtain the $5,000 from an
allowable FHA funding source.
Enhanced Counseling
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.
Right of Rescission
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.
Closing Guidance
Lenders are required to ensure the property, when used as collateral for the HECM, meets the following property requirements:
Will serve as the principal residence of the HECM mortgagor.
Construction is complete and a certificate of occupancy or its equivalent has been issued.
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.
Consistent
with existing lending practices, lenders are responsible for
determining whether a particular HECM loan is open or closed-end
credit. In accordance with 24 CFR 206.43, lenders must comply with the
regulatory disclosure requirements.
3 Comment(s)
Mortgages
10/30/08 12:16pm
Great info. It's good to know what's going on with mortgages and to get as much knowledge and information as possible. Articles like this are helpful in clarifying common questions.
Frederic P. McDowell
10/30/08 6:46pm
what is "allowable fha funding source"
Monte
1/22/09 4:20pm
OK - this is all quite confusing - so let me ask questions:
Using an example of my brother who owns a lot upon which he wishes to build his retirement home. The new home is estimated to roughly cost $100 to $120,000. But he is unable to do so because he has not been able to sell his current home listed at roughly $150,000. He has no mortgage on his present home - it is free and clear.
I understand, if I'm correct, he could just stay there and forget building his retirement home on the lot he owns. To assuage his disappointment he could take out a reverse mortgage on his home and be paid monthly income from it. He is 62 and would thus qualify if I have this part accurate.
The question, rather obvious, is there someway he can use the new Reverse M. rules to purchase his retirement home, have it built on the lot, and qualify for the reverse mortgage? I understand the new home must have the certif. of occupancy issued prior to his getting proceeds from the reverse mortgage.
So how can this new law be used to structure his objectives? Must he sell his old home first?
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