8193 / Can a HECM be used to purchase a new home?

Yes. Known as the HECM for Purchase, this program was designed to allow seniors to purchase a new principal residence and obtain a reverse mortgage within a single transaction.

This program has been available since it was originally introduced as part of the Housing and Economic Recovery Act of 2008, yet has only recently started gaining popularity.

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, where 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.

Only properties where construction is completed are eligible for a HECM-for-Purchase.¹

The funding of a HECM for Purchase is an area that has generated an unexpected amount of confusion and debate among borrowers and some advisors. In order to help clarify this, the following text has been taken from the Mortgagee Letter 2009-11 dated March 27, 2009, addressed to All FHA-Approved Mortgagees and All HUD-Approved Housing Counseling Agencies:

FUNDING SOURCES: HECM mortgagors must use cash on hand or cash from the sale or liquidation of the mortgagor’s assets for the required monetary investment. The monetary investment requirement can also be met by the use of approved funding sources as defined in HUD Handbook 4155.1 REV-5, section 2-10, with the exception of the following funding sources which may not be used:

Sweat Equity

Trade Equity

Rent Credit

Cash or its equivalent, in whole or in part, from the following parties, before, during or after loan closing:

The seller or any other person or entity that financially benefits from the transactions, or

Any third party or entity that is reimbursed, directly or indirectly, by any of the parties described in the previous bullet.

FHA prohibits seller contributions (also known as “seller concessions”), the use of loan discount points, interest rate buy downs, closing cost down payment assistance, builder incentives, gifts or personal property given by the seller or any other party involved in the transaction. This includes customary charges that are normally paid on behalf of the borrower by the seller.

GAP FINANCING: Consistent with existing regulatory requirements in 24 CFR 206.32(a), HECM mortgagors 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.