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PROPERTY FLIPPING

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

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 sale price exceeds 100% of the previous sale price, FHA will require additional documentation validating the property’s value.  Lenders providing HECM financing for purchase transactions must comply with FHA regulations at 24 CFR 203.37a and guidance provided in ML 2006-14.

REPAIR AND PROPERTY SET ASIDES

Properties being purchased using the HECM for Purchase program must meet FHA’s minimum property requirements.  For purchase transactions where major property deficiencies threaten the health and safety of the homeowner and/or jeopardize the soundness and security of the property, all repairs must be completed by the seller prior to closing.  Appraisers must complete the appraisal report as “Subject To” the completion of these repairs. Additional appraisal guidance can be found in ML 2005-48 and Revised Appendix D of Handbook 4150.2 CHG-1.

Major Property Deficiency Examples:

No running water

Leaking  roof

No primary heating source

Inadequate electrical systems (including lighting)

Inoperable doors and windows (inhibited ingress and egress)

State or local code violations

HECM mortgagors will continue to have the option of electing to have the lender set aside funds from their monthly payments or by charging such funds to the line of credit for payment of property charges such as ground rent, homeowner association fees, taxes, hazard insurance, etc.

MAXIMUM CLAIM AMOUNT CALCULATION

The maximum claim amount is used to determine the principal limit and mortgage insurance premium for FHA-insured mortgage transactions.  For purchase mortgages only, the maximum claim amount will be the least of:  1) the appraised value; 2) sale price; or 3) FHA mortgage limit for a one family residence.  This applies to all one-to-four unit properties.  Neither the estimate of closing costs nor the initial mortgage insurance premium is used in the calculation of the maximum claim amount.  

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