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!
Michael G. Branson (CEO All Reverse Mortgage Company)is a Mortgage Broker who has over 31 years of mortgage banking experience. Toll Free (888) 801-2762
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