Reverse mortgage loans allow older homeowners to access their home equity while postponing repayment of the loan balance well into the future, typically until the last homeowner passes away or moves out permanently. While monthly mortgage payments aren't mandatory, remaining current on essential property charges, such as taxes and insurance, is crucial.
The top preference for reverse mortgage seekers is the Home Equity Conversion Mortgage (HECM), the only reverse mortgage backed by the Federal Housing Administration (FHA). These loans provide financial flexibility, helping homeowners to cover various expenses, including healthcare costs and home repairs.
What if, while going through the HECM application process, you discover that your home requires repairs? Let's delve into the process and examine the options available to you to ensure your home's long-term safety and security.
This article covers:
The Home Appraisal: A Crucial Step
A home appraisal plays a key role in obtaining a reverse mortgage. Conducted by a qualified appraiser, this assessment determines your home's fair market value and verifies its compliance with the U.S. Department of Housing and Urban Development (HUD)’s minimum property standards. Additionally, the appraiser identifies any necessary repairs required to meet these standards.
The appraised home value, the age of the youngest borrower (or eligible non-borrowing spouse, if applicable), and the prevailing interest rate collectively determine the loan proceeds you may qualify for.
During underwriting, the underwriter assesses whether essential repairs noted in the appraiser's report must be completed before loan closure, independent of loan funds, or can be addressed post-closure with loan proceeds.
Repairs Before Loan Closing
Generally, structural defects and disrepair that raise health and safety concerns must be remedied before closing, including leaky roofs, black mold, and foundation concerns. Funding these repairs upfront can be achieved through various means, such as personal funds or external borrowing (e.g., borrowing from a family member with a promise to pay them back after HECM loan proceeds are available).
Once the work is completed, a thorough inspection by the original appraiser ensures compliance with HUD standards.
Introducing Repair Set-Asides: Planning for Post-Closing Work
For non-immediate repairs, lenders can set aside loan proceeds, provided the estimated repair costs don’t exceed 15% of the lesser of the home value or $1,149,825. This repair set-aside, outlined in the loan agreement, comes with specific deadlines mandated by HUD, emphasizing timely completion of the repairs (after closing on the loan) to avoid default.
Navigating Repairs After Closing
Some repairs may necessitate immediate attention, while others can be deferred, subject to the underwriter's discretion. Required repairs that can be completed shortly after closing include issues that don’t pose health and safety risks, such as a roof replacement if the roof has a life expectancy of less than two years and isn’t leaking.
Effective communication with your loan servicer is crucial for repairs slated through a repair set-aside, from contractor selection to post-repair reinspection.
Key Points on Repair Set-Asides
Typically, six months are allocated to complete and inspect the work post-closing
HUD requires that set-aside repairs be completed within 12 months
Ensure your contractor is willing to be paid after completing the work
Estimates from contractors or appraisers are increased by 1.5 times
Repair estimates exceeding 15% of the lesser of the home value or $1,149,825 must be completed before closing on the HECM
Inspections are necessary before disbursing funds for completed repairs
Following inspection, any remaining loan proceeds can be accessed for open-ended loans, such as those set up with a line of credit or fixed monthly advances
Let's Start a Conversation!
HECMs offer a unique solution for addressing home repairs, allowing older-adult homeowners to maintain ownership while leveraging their equity. Equipped with tools like repair set-asides, you can confidently oversee essential repairs, ensuring your home remains a secure and comfortable sanctuary for the future.
Ready to explore further? Let's start a conversation today!
Joan Qvigstad, Retirement Mortgage Specialist
NMLS #38002 | Fairway Independent Mortgage Corp.
Phone: (360) 271-5946 | Email: joanq@fairwaymc.com
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Copyright©2024 Fairway Independent Mortgage Corporation (“Fairway”) NMLS#2289. 4750 S. Biltmore Lane, Madison, WI 53718, 1-866-912 4800. All rights reserved. Fairway is not affiliated with any government agencies. These materials are not from HUD or FHA and were not approved by HUD or a government agency. Reverse mortgage borrowers are required to obtain an eligibility certificate by receiving counseling sessions with a HUD-approved agency. The youngest borrower must be at least 62 years old. Monthly reverse mortgage advances may affect eligibility for some other programs. This is not an offer to enter into an agreement. Not all customers will qualify. Information, rates, and programs are subject to change without notice. All products are subject to credit and property approval. Other restrictions and limitations may apply. Equal Housing Opportunity.