Reverse Mortgages and Repairs to Your Home — What You Need to Know
One of the biggest draws for reverse mortgages is their ability to help older adults remain in their homes, while also providing them with some additional cash flow via their home equity.
But while not everyone’s home may be physically equipped to suit their aging needs, certain features of reverse mortgages can help cover some much-needed repairs to ensure borrowers can live both safely and comfortably during their retirement years.
The most common reverse mortgage, known as the Home Equity Conversion Mortgage, enables homeowners age 62 and older to access their home equity. The funds, or loan proceeds, received from the reverse mortgage are non-taxable and may be used without restriction to cover personal living expenses, such as health care costs or home repairs.
But before you can get a reverse mortgage, you will need a home appraisal as part of the loan application process.
Why a Reverse Mortgage Appraisal? How Reverse Mortgages Work
An appraisal determines the value of your home. The value of your home is an important part for determining if you qualify for a reverse mortgage. Your qualification and loan amount is determined primarily by the value of your home, the amount you owe on the home and your age.
However, to qualify for the loan, your home must also meet certain standards or you must be able to qualify for enough money and commit to making the necessary repairs.
FHA Reverse Mortgage Appraisal Guidelines
Home appraisals are essential to your prospects of getting a reverse mortgage. When an appraiser visits your residence, not only will he or she assess the current market value of your home, but also the physical state of your property.
In the assessment of an individual’s residence, the appraiser bases the examination on health and safety requirements outlined in the Department of Housing and Urban Development’s (HUD) Minimum Property Standards.
If an appraiser discovers that your home is in a state of disrepair, you will not be able to get a reverse mortgage until the issues in question have been resolved. The following conditions are subject to repair before you may be eligible to get a reverse mortgage:
- Foundation/structural issues
- Termite damage
- Leaky roof
- Other safety issues
When your home doesn’t meet HUD’s minimum health and safety standards, that work needs to be done first, but some people don’t have the money for it.
In the event that an appraiser reveals certain property defects with your home, you are then required to hire a contractor to complete the repairs. Often this is done by setting aside funds specifially for this purpose, known as a repair set-aside or repair rider.
How a Reverse Mortgage Works When You Need Repairs — Repair Set-Asides
The amount of proceeds you are eligible to receive from a reverse mortgage depends on a number of factors, including your age, current interest rates and the appraised value of your home.
The funding amount of your reverse mortgage can also be impacted depending on the magnitude of repairs needed for your home, if any. While repairs should be completed prior to loan closing, when they cannot be, that’s where a “Repair Set-Aside” comes into play.
A “Repair Set-Aside” is a portion of your reverse mortgage funds that are used solely for completing the required repairs as determined by an appraiser.
You are allowed a set-aside if the estimated cost of the necessary repairs is within 15% of your reverse mortgage’s Maximum Claim Amount, which is the appraised value of your home (or $822,375 — whichever amount is less).
Repair set-asides are used to complete certain fixes on your home, typically those that do not impact immediate health and safety. Such repairs may include, but are not limited to:
- Paint issues
- Minor plumbing fixes
- Broken concrete
- Exposed wood
- Cracked glass
It is important to note that all repairs outlined in the appraisal must be completed within six months of loan closing. If repairs are not completed within 12 months, other funds from the reverse mortgage line of credit may be frozen until the repairs have been completed, or the loan can be called due and payable. Repairs to be completed under the repair rider are additional terms of the loan and failure to complete them can result in the loan being called due and payable.
To verify that the required repairs have been completed, your loan servicer will arrange to have the repair work inspected.
Once it has been verified that all the necessary repairs have been completed — following the final inspection and payment to the contractor — any remaining funds in the repair set-aside are transferred to the reverse mortgage line of credit, at which point they become available for the borrower to draw upon.
If you would like to do additional work on your property outside of the required repairs, you will have to pay for the work from your own personal funds or from your reverse mortgage proceeds.
How Will a Reverse Mortgage Work for You?
Reverse mortgages are not for everyone, but they are a great tool for people who want to stay in their home and either eliminate mortgage payments and/or access cash. Find out if you qualify for a reverse mortgage.