October 20, 2008

**MORTGAGEE LETTER 2008-33**

**TO: ALL APPROVED MORTGAGEES**

**ALL HUD-APPROVED HOUSING COUNSELING AGENCIES**

**SUBJECT:** Home Equity Conversion Mortgage (HECM) for Purchase Program

The Housing and Economic Recovery Act of 2008 (HERA) provides HECM
mortgagors with the opportunity to purchase a new principal residence
with HECM loan proceeds. 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. Accordingly, eligible mortgagors now have the
opportunity to purchase a principal residence with HECM loan proceeds.
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.

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, which 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.

[Eligible Property Types]{.underline}

Only properties where construction is completed, as defined in Mortgagee
Letter 2007-06, are eligible for FHA insurance under 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, meets FHA's title
requirements. Those requirements, as provided in section 255(b)(4) of
the National Housing Act and implemented in the HECM regulations at 24
CFR 206.45, provide, in part, that the HECM must be on real estate held
in fee simple, or on a leasehold under a lease for not less than 99
years which is renewable, or under a lease having a remaining period of
not less than 50 years beyond the date of the 100^th^ birthday of the
youngest mortgagor.

[Ineligible Property Types]{.underline}

The following property types are ineligible for FHA insurance under the
HECM for Purchase program:

-   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, 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.

    [Property Flipping]{.underline}

Prospective mortgagors should be alert to efforts to coerce them into
obtaining a reverse mortgage as part of a purchase contractual
obligation, or purchasing a distressed home in need of substantial
repairs but being sold at or above market rate.

As such, HECM 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. Lenders providing HECM
financing for purchase transactions must comply with guidance provided
in [Mortgagee Letter
2006-14](http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/06-14ML.doc).

[Refinancing and Existing Upfront Mortgage Insurance Premium
(MIP)]{.underline}

The HECM refinance authority is only applicable when the property that
serves as collateral for FHA-insurance remains the same. Therefore,
existing HECM mortgagors 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.

[Monetary Investment]{.underline}

Consistent with existing policy, the maximum claim amount and principal
limit will continue to be calculated in accordance HECM regulations at
24 CFR 206.3, HUD Handbook 4235.1 REV-1, and applicable MLs. 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.

HECM mortgagors may choose to provide a larger investment amount in
order to retain a portion of the available HECM proceeds for future
draws.

*Required Investment Examples*

+-----------------------+-----------------------+----------------------+
| **Example #1**        | **Example #2**        | **Example #3**       |
+-----------------------+-----------------------+----------------------+
| Appraised             | Appraised             | Appraised            |
| Value/MCA\*\$300,000  | Value/MCA\*\$300,000  | Value/MCA\*\$300,000 |
|                       |                       |                      |
| Sales price           | Sales price           | Sales price          |
| \$300,000             | \$325,000             | \$280,000            |
+-----------------------+-----------------------+----------------------+
| Principal Limit\*\*   | Principal Limit\*\*   | Principal            |
| \$199,500             | \$199,500             | Limit\*\*            |
|                       |                       |  \$199,500           |
+-----------------------+-----------------------+----------------------+
| Minus Loan Fees \$    | Minus Loan Fees \$    | Minus Loan Fees \$   |
| 15,500                | 15,500                | 15,500               |
+-----------------------+-----------------------+----------------------+
| Avail. HECM proceeds  | Avail. HECM proceeds  | Avail. HECM proceeds |
| \$184,000             | \$184,000             | \$184,000            |
+-----------------------+-----------------------+----------------------+
| Req. Investment       | Req. Investment       | Req. Investment \$   |
| \$116,000             | \$141,000             | 96,000               |
+-----------------------+-----------------------+----------------------+

\* Appraised Value/MCA is defined as the maximum claim amount and is
used to determine the principal limit which is the lesser of the
appraised value or the FHA national mortgage limit. The principal limit
is the maximum amount available to the HECM mortgagor.

\*\* Assumes the age of the youngest HECM mortgagor is 67 and a
principal limit factor of .665 for a 5% expected average mortgage
interest rate.

In each example above, loan fees are deducted from the principal limit
of the HECM. However, it is not required that loan fees be deducted from
HECM proceeds. The mortgagor may pay loan fees as part of the required
monetary investment and use all HECM proceeds toward the purchase
transaction.

[Funding Sources]{.underline}

HECM mortgagors must use cash on hand or cash from the sale or
liquidation of the mortgagor's assets for the required monetary
investment.

[Verification of Funding Sources]{.underline}

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.

[Gap Financing]{.underline}

Consistent with existing regulatory requirements at 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.

*Gap Financing Example*

A prospective HECM mortgagor completes the required reverse mortgage
counseling and receives an estimate stating the required monetary
investment could be \$25,000. The prospective HECM mortgagor has
\$20,000 in liquid assets but is short the remaining \$5,000. The
prospective HECM mortgagor cannot take \$5,000 from a credit card or
obtain interim financing in order to deposit the money into their
banking account in anticipation of being required to bring this amount
to closing. However, the prospective HECM mortgagor may obtain the
\$5,000 from an allowable FHA funding source.

[Enhanced Counseling]{.underline}

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.

[Right of Rescission]{.underline}

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.

[Closing Guidance]{.underline}

Lenders are required to ensure the property, when used as collateral for
the HECM, meets the following property requirements:

-   Will serve as the principal residence of the HECM mortgagor.

-   Construction is complete and a certificate of occupancy or its
    equivalent has been issued.

-   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.

Consistent with existing lending practices, lenders are responsible for
determining whether a particular HECM loan is open or closed-end credit.
In accordance with 24 CFR 206.43, lenders must comply with the
regulatory disclosure requirements.

[Data Entry]{.underline}

Instructions on how to enter HECM for Purchase transactions into FHA
Connection and Insurance Accounting Collection System will be provided
in a separate instruction.

[Information Collection Requirements]{.underline}

The information collection requirements contained in this Mortgagee
Letter were approved by the Office of Management and Budget (OMB) in
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
3501-3520).  Approval of HECM Program is covered by OMB control number

2502-0524, with disclosures requirements being covered by OMB control
numbers 2502-0265 and 2502-0059. An agency may not conduct or sponsor,
and a person is not required to respond to, a collection of information
unless the collection displays a valid control number.

If you have questions regarding this Mortgagee Letter, please call FHA's
Resource Center at

1-800-CALL-FHA (1-800-225-5342). Persons with hearing or speech
impairments may access this number via TDD/TTY by calling 1-877-TDD-2HUD
(1-877-833-2483).

Sincerely,

Brian D. Montgomery

Assistant Secretary for Housing-

Federal Housing Commissioner