HECM Frequently Asked Questions
What is HECM's Background/Why Was the HECM for Purchase Program Created?
The HECM for Purchase program was created in 2009, allowing homeowners to combine the purchase of a new home (principal residence) with a reverse mortgage in one transaction. The program makes it possible for homeowners age 62 and older to move closer to family, downsize to a smaller home, such as a home on one level, or obtain homes with modifications that meet their needs, such as handrails, ramps and more.
Why Would Seniors May Want to Buy a House with a HECM Loan?
The H4P provides seniors who want to buy a house with an option that can overcome some of the usual hurdles. The challenges of qualification are minimal:
- Credit is a very minor consideration.
- Credit scores are not a factor.
- Borrowers are not limited by their income or net worth.
- The senior will be able to buy a more substantial house with the same down payment, or they may be able to buy a house they want while retaining a portion of the proceeds from the sale of their current home.
- In all cases, there is never a monthly principle or interest payment, and home buyers will only be required to keep their properties taxes paid and the home insured.
- With no requirement to make mortgage payments, as long as one of the original borrowers occupies the home, regardless of their future financial status or income, regardless of fluctuations in home values or financial market, there is no risk of losing their home.
What are Eligible Property Types?
Only 1- to 4-family dwelling units on which construction has been completed are eligible for 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. The collateral must be on real estate held in fee simple. If property is held in leasehold, then additional restrictions may apply.
What are Ineligible Property Types?
The following property types are ineligible for FHA insurance under the HECM for Purchase program:
- Cooperative units
- Newly constructed principal residences 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
- 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 Foundations for Manufactured Housing Guide
What Are the Advantages of the H4P?
There are several advantages to the HECM for Purchase (H4P).
You can purchase a home without the obligation of monthly mortgage payments. If you wish, you can use proceeds from the sale of your current home to purchase your new home. You remain the homeowner with the HECM for purchase, so you must continue to pay property taxes and insurance on the home as well as maintain it.
Qualifying for the HECM for Purchase also can be easier than a traditional mortgage. A poor credit score may not be a barrier to qualify. In addition, because the HECM for Purchase is insured by the Federal Housing Administration (FHA), it is a “non-recourse” loan. This means that regardless of the loan balance, you and your heirs will not be responsible for repaying more than the home’s appraised value at the time the loan becomes due and payable.
Last, you can sell the home or make payments toward the loan balance without worry about prepayment penalties.
How do I Qualify?
To qualify for the HECM for purchase, you must be age 62 or older, and your new home must be your primary residence, meaning that you will live in the home more than six months per year.
You must complete a required counseling session to ensure you understand the terms and obligations of a reverse mortgage, and you’ll complete a financial assessment to ensure you’re able to continue making payments for property taxes, homeowner’s insurance and maintaining your home.
Is the H4P mortgage interest rate fixed or variable?
You can choose either fixed or variable.
How is the down payment determined?
Down payment is determined by three factors: age of youngest borrower, purchase price of home, and current interest rate.
Does my existing home have anything to do with the H4P transaction?
No, you are allowed to be on title to both homes. You can rent your existing home for cash flow or sell it after you move into your new home. The only disqualifying issue would be if your current home has a FHA mortgage balance. This would require you to refinance into a non-FHA mortgage or sell your home before using the H4P Program.
If you own other real estate then your income will need to support the PITI (principal, interest, taxes and insurance) on existing real estate as well as the property taxes, insurance and/or condo dues on your new HECM property. After all real estate expenses, installment, and revolving debt is subtracted from income, there must be residual income remaining. This is based on area you live in and if you are single/married. All items will be verified.
If I’m building a new home instead of purchasing an existing home, what should I know?
All new construction may require a Certificate of Occupancy (CO) once the home has been inspected and it’s determined to be move-in ready. FHA requires lenders to wait until the CO is issued before a loan application can be taken. The first step is to get a Pre-Approval letter from us prior to going into contract with the builder. Please make sure to get us in touch with the builder so we can verify everything needed in the contract.
Isn’t the H4P Program designed primarily for people who don’t have a lot of money?
The H4P Program is being used by middle income earners as well as millionaires. It allows financially savvy people to use their money for other things rather than tying up a large portion of it inside their home. The Financial Assessment rules make this program a perfect fit for those with good credit and assets.
What is the Process for the H4P?
In the first phase of the process, your loan officer will take information to determine whether you qualify for the program. This will include information about income, assets and other real estate. We will ask if you intend to keep your current home or other properties.
You may have a total of three properties under the HECM for Purchase: the home you’re trying to purchase and two additional properties. Having more than three properties will make you ineligible for a HECM for purchase. If you are planning to keep other properties, we will want to know about your mortgage, property taxes, insurance and any homeowner association fees. We also will determine whether you are able to pay the closing costs, including the required monetary investment.
You’ll also complete HECM counseling. If you are buying a newly constructed home, a Certificate of Occupancy from your city is required to show that the house is ready to occupy.
Next, we will talk with you about expectations and obligations regarding the purchase contract, which are different from a home purchase with a traditional mortgage. With the HECM for Purchase, the seller must pay for any repairs required by FHA guidelines. * No concessions, such as seller payment of closing costs or funds in lieu of repairs, are allowed. The house may need more than one inspection if we require it. The property for purchase will be appraised to ensure its value is in line with the HECM expectations.
Then the loan will go to processing and underwriting. Additional documentation may be needed to verify your ability to pay a mortgage on property you plan to keep as well as the property taxes, homeowner’s insurance and any other fees, such as HOA dues for all the properties you will own. We also may verify again that you have funds for closing the loan that meet FHA’s requirements.
The last step in the loan process is closing the loan and funding. Your lender will notify you of the closing date and time.
After the loan closes, the servicer will confirm with we that you will occupy the new home within 60 days of closing. You are required to occupy the home within that time period. If you’re not occupying the home as expected in the loan terms, the loan may be repurchased.
What are the Borrower's Obligations?
Obligations under the HECM for Purchase are the same as the traditional HECM reverse mortgage. You must continue payments for property taxes, homeowner’s insurance, any homeowner’s association fees, and the cost for basic maintenances of the home, in order to avoid defaulting on the loan.
There are some aspects of the HECM for Purchase that differ from the traditional HECM reverse mortgage. Because reverse mortgages are meant to help seniors age in place, you must move into the new home within 60 days after closing, and the new home must become your primary residence.
When is the HECM for Purchase Due?
Although there is no specific date in which the HECM for Purchase loan is due, a few events can cause the loan to become due and payable. The following are such events that would cause loan maturity:
- The last remaining borrower passes away or leaves the home to live elsewhere for more than 12 consecutive months.
- The home is sold.
- You do not meet the borrower obligations of maintaining payment of property taxes, homeowner’s insurance, homeowner’s association fees, and basic home repairs or you fail to comply with other loan terms.
What are my obligations with the Home Equity Conversion Mortgage for Purchase after the loan has closed?
You must be able to pay property taxes, homeowner’s insurance, any other related fees, such as HOA, and maintain the home in good condition. You must begin occupying the home within 60 days after closing. In addition, you must occupy the home as your principal residence at least six months of the year.