There exists a common misconception that a reverse mortgage can be used to fix a home, with no further clarification. It appears to stem from various marketing efforts that you see in print or on television, that make it seem like a simple process. The general perception is that we can close a loan for a customer with a home in disrepair, and provide the cash at closing needed to do the repairs. Unfortunately, that is far from the case in many instances.
Who Decides What Needs To Be Repaired And When
Soon after applying for a reverse mortgage, your home will be inspected and valued by an FHA-approved appraiser who will note all repairs that are necessary for the property to meet minimum property standards per the HUD handbook. Repairs are required when the issue affects the health and safety of the occupants, the security of the property, or the soundness of the structure. There are times when an appraiser will list items that are none of the above, and the underwriter will have the final call on when the issue needs to be addressed, if at all.
Why Would Anything Need To Be Repaired Before Closing
Since a reverse mortgage uses your home as the sole collateral for the loan, it is important that your home isn’t damaged further before the repairs are completed. There are only two ways that lenders handle repairs: upfront or via a repair escrow. The repair escrow is required to give you six months after closing to do the work, so that’s a reasonably lengthy amount of time for an issue to get worse. Due to that risk, especially with issues of water penetration, many items have to be addressed before you can close the loan.
Types Of Repair Issues
Customers are often confused about the process of determining if a repair must be fixed upfront or after closing via a repair escrow. The underwriter will have the final say on whether the issue affects the health and safety of the occupants, the security of the property, or the soundness of the structure. If the issue is serious enough to impact one of the three qualifications listed, it will be required upfront. If it is not serious, the issue can be addressed after closing through a repair escrow.
Examples of issues that have to be addressed upfront:
- Empty pool (safety)
- Major roof problem (soundness)
- Foundation issue (soundness)
- Missing exterior handrails (safety)
- Major electrical or plumbing issue
Examples of issues that can be addressed after closing:
- Exterior peeling paint
- Broken or non-functioning windows
- Rotten/damaged exterior wood or siding
- Minor electrical or plumbing issue
Examples of issues that should be waived:
- Cracked windows
- Interior paint issues (home constructed after 1978)
- Damaged counters or cabinets
- Stained carpets
- Poor workmanship
- Damaged sheetrock
Keep in mind these examples are not inclusive of every repair issue that can be encountered.
The Process of Fixing Repair Issues Upfront
During the underwriting process, you’ll find out if the repair work needs to be completed prior to closing the loan. If that is the case, you’ll have a few options on how to pay for it.
The first using your own cash on hand to have a contractor do the work. In that case, you would choose who does the work and the original appraiser would come back out to verify the work has been completed in a sufficient way. The second option is to find another means of borrowing the money to pay a contractor (credit card, unsecured loan, using your existing line of credit, borrowing from family, etc). In both instances, the appraiser’s second visit fee of $125 will be added to your financed closing costs.
If you are unable to come up with the cash for the upfront repairs on your own, there is a company involved in reverse mortgages that will pay a contractor to do the repairs. The expectation is that they will be repaid at the closing table. The lending company chooses the contractor in this situation, so the work is going to be priced “above market.” The benefit to you is that someone else is able to pay for the work to be done. If the amount of work is significant, this option can be a lifesaver. They’ll make you sign a contract to keep you from getting your home repaired and then cancelling the reverse mortgage transaction.
The Process Of Using A Repair Escrow
If the underwriter determines that the repairs do not need to be completed before closing, and the total repair work is not greater than 15% of the home value, you can elect to have a repair escrow (aka set-aside).
You can provide a contractor’s estimate for the work or use the estimated repair cost that is shown in the appraisal. If using your own contractor, the set-aside will be 150% of the estimate you provide. If using the appraiser’s estimate, the set-aside will be 200% of the amount listed in the appraisal. The extra funds are to cover the risk to the lender that your contractor falls through or the appraiser was not very accurate with the cost estimate.
As part of the repair set-aside, there will typically be a $50 fee for the loan servicer who will follow up on the work after closing, and a fee of $125 for the appraiser who will be hired to verify the work has been done. You are given six months from the closing to have the work completed and inspected. After the appraiser gives the green light to the loan servicer, the check will be cut to the contractor. Keep in mind, you will need to have a contractor that is willing to be paid after the work is completed and no sooner. After that process is complete and the contractor signs a statement that he or she has been paid in full, the rest of the funds are moved over to your line of credit where they can be drawn immediately.
Making Upgrades or Doing Additional Repair Work
There are times when we encounter a client who wants to renovate (upgrade) his or her home as part of the reverse mortgage process. HUD doesn’t allow upgrades to be part of the repair escrow or part of the work that is performed by the company mentioned earlier on the front end. Upgrades are items that were not called for by the appraiser and/or confirmed by the underwriter as needing to be addressed.
If you want to upgrade your home with reverse mortgage funds, you will either need to do so with your own cash prior to closing, or with cash you obtain after the reverse mortgage closes. The downside to doing the upgrades after closing, if significant, is that the appraised value won’t reflect the changes you make. You would have to refinance your reverse mortgage to reap the reward of the additional value you have added. There is a minimum wait of 18 months to refinance with some other challenges that you would need to think through before proceeding with that plan.
Call Us To Strategize
As you can see, using a reverse mortgage to repair your home is quite possible, but it is very important that you work with a reverse mortgage specialist that knows the process well. That being said, why not give us a call to bounce your plan off of us before proceeding?