HUD is moving a bit quicker on the new provisions of the Modernization Bill now that they got the lending limit issue out of the way. This is good news for those interested in downsizing from larger, more expensive homes into smaller or less expensive homes. They don’t tell you how they work here so I’ll quickly break it down and then share the press release from NRMLA, the National Association of Reverse Mortgage Lenders, which is the industry association.

Suppose you were interested in moving out of your larger, more expensive home that you could sell for $400,000 and interested in a 55 and over community that had a condo available overlooking the 5th hole that sold for $150,000. You have the money to pay for the home outright and would only have condo fees and taxes to pay for the rest of your days there. But what if you could do this and increase your retirement cash flow? Now you can; you have the ability to put down a percentage of the home’s purchase price, say half, or in this case $75,000 and finance the other half with a reverse mortgage which means you will not have to make payments on this financed portion. Why would you do that? If you paid for it outright, you’ve reduced your available cash and its earning capabilities to $250,000 from the $400,000 you had after the sale of your other home.

In our example, by putting down only $75,000, you now have $325,000 in available cash from your original $400,000 AND you will not have a monthly mortgage payment, so you will still pay just your condo fees and taxes on the property for as long as you live there. You’ve just increased your retirement income or cash flow by 30%. Judging by most folks that live in 55 and over communities or that have moved to smaller, more easily maintained homes, they don’t intend to move again and this is the home where they will be until their last days, so remaining equity isn’t necessarily the most important thing to them.

What is your take away from this post? This is BRAND NEW, YOU DIDN’T HAVE THIS CAPABILITY YESTERDAY, and you can take advantage of it January 1st if you are planning on buying a home and/or downsizing if you are 62 or over and you can increase your retirement cash flow by 30% in some cases using this new home purchasing program. The older the client, the smaller percentage they have to put down and the larger increase in retirement cash flow they will realize and that’s a good thing to have in these times.

Here is a release sent from NRMLA to its members today:

October 28, 2008

Yesterday, the Department of Housing and Urban Development issued Mortgagee Letter 2008-33: Home Equity Conversion Mortgage Home Purchase Program. We appreciate the fact that HUD incorporated NRMLA member questions and concerns and applaud HUD for bringing this new feature to market.

Key points, include:

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.

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 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 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.

At closing, HECM 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 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.

Darryl Hicks, Vice President
Communications
NRMLA

A Few More Related Articles of Interest:

Still no reverse purchase program…

Purchase your new retirement home with equity from your old home.

New potential lending limit increase for HECM reverse mortgages.

Reverse Mortgages Make Money for Government

Ginnie Mae HECM MBS Now Official