A previous article (Valley News, August 11, 2014), explained the basics of the reverse mortgage to convert unused equity into additional income for seniors. This follow-up article focuses on another part of the Housing and Economic Recovery Act (HERA) of 2008, the “Home Equity Conversion Mortgage (HECM) for Purchase.”
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.
This provision allows seniors the opportunity to purchase a new principal residence with HECM loan proceeds and make no further mortgage payments. Effectively, with the mortgagor putting as little as 45% down (depending upon their age) the federally-insured lender pays the remainder of the mortgage payments. This makes seniors’ dreams of downsizing without mortgage payments a reality.
The Pew Research Center estimates that 10,000 men and women cross the demarcation line of 65 years old each day in America. This trend is projected to continue for the next 19 years. With more of the population becoming a member of this special class of over 65, the need for options in housing and relocation becomes more critical with each passing year.
The available equity that the senior community has in their homes is over three trillion dollars. This amount represents more financial resources than many countries’ GDP (gross domestic product). Of the forty million seniors in America, 80% own their home and 72% own their home mortgage-free.
The three trillion dollars of equity is a reservoir of untapped resources that could contribute to an expansion of the economy. But the equity is locked away and unused – a homeowner’s bank account that does not allow withdrawals. Sixty-three percent of seniors have their retirement savings in their home. Only thirty-seven percent have an IRA or 401K account.
Home equity has become the retirement account of most seniors in the United States. But the problem persists, how to tap into the home equity for personal needs or plans to relocate?
Up until the last few years, there were only two ways available. A home equity loan, which requires an employment history, credit score and income verification, leaves the senior with a mortgage on their own money. A second option is to sell the home to repurchase another and become property rich but cash poor.
In 2008, in the aftermath of the sub-prime meltdown and bank bailouts, an important piece of legislation was passed to stimulate home purchasing and increase home refinancing. The Housing and Economic Recovery Act was designed to stabilize the economy by securing home ownership and incentivizing certain types of home purchases.
This legislation has made the reverse-mortgage option attractive to approximately 500,000 seniors. Many seniors have tapped into their home equity to access a monthly payment stream. But the reverse-mortgage option alone does not provide the needed alternative that allows the senior to relocate to a new home.
In section 2122 of HERA, “Home Equity Conversion Mortgages”, the provision was made to allow seniors to purchase a new home with only a portion of the proceeds of the sale of their current home used as a down-payment, with no monthly mortgage payments for the rest of their life.
“Notwithstanding any provision of this section, the Secretary may ensure, upon application by a mortgagee, a home equity conversion mortgage upon such terms and conditions as the Secretary may prescribe when the home equity mortgage is used to purchase a one to four family dwelling unit, one unit of which the mortgager will occupy as a primary residence, and to provide for any future payments to the mortgager, based on available equity, as authorized under subsection (D)9.” (Sections 2122)
The requirements for such a purchase are minimal compared to a conventional home purchase. The individual(s) must be over 62 years of age, live in their new home permanently, pay property taxes, fire insurance, complete HUD counseling and pay any HOA fees. The loan does not require any employment history or FICO scores. It is federally insured (HUD) and AARP approved.
HECM loans are limited to the GSE (Government-Sponsored Enterprise) loan limits, currently $417,000 for a one-unit single-family property. Floor and ceiling loan limits vary by median home prices by area and year and cannot exceed 150% of Freddie Mac national conforming loan limits (maximum is currently $625,500).
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.
The government has placed limits on HECM origination fees – capped at 2.0 percent of the maximum claim amount of the mortgage (see a professional for details on these limits). Further, the government prohibits HECM lenders from being associated with any “financial or insurance activity” to discourage “cross-selling” or conditioning the HECM on purchase of other financial or insurance products (except as may be customary and normal in a real estate transaction).
The benefits of such a program are immense and untapped. The senior can relocate to downsize their present dwelling, for example, from a two-story to a single level home. They can relocate to a senior community with desired recreational facilities and activities or a locale that is closer to family and friends.
The “HECM for Purchase” is not a government giveaway or a grant, but a program that allows the senior to use their present equity toward a new home.
Unfortunately, most real estate professionals and senior specialists are unaware of this program that can help thousands of seniors see their dreams come true. Seek out a senior real estate specialist that can inform you of the benefits of the “Home Equity Conversion Mortgage for Purchase” program.
Lawrence “Larry” Hilliard is a real estate professional (DRE #01959745) specializing in seniors and HECM for Purchase programs. He can be reached at (951)-445-4833. His partner, John Casas, can be reached at (951) 816-8206. Both are with Home Partners Realty in Orange, California, visit www.IHaveNoMortgage.com to learn more.
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