Reverse Mortgage Appraisal Issues

While obtaining a reverse mortgage or Home Equity Conversion Mortgage (HECM) is one of the easiest processes in the industry, there are some hiccups that can occur. The primary source of problems in the process is the appraisal. HUD doesn’t make it any easier to pass the asset test with the reverse mortgage. That being said, most obstacles can be overcome.

Some key terminology to keep in mind is first “Safety, Sanitation, and Structural Soundness.” Second, is “future utility, durability and economy of maintenance.” These are the words used in the HUD guide for appraisers for all FHA property evaluations and they set the tone for what the appraiser is on the look out for when visiting your home. Think of it this way: HUD expects that at the end of your agreement (your death) they will be the owner of your asset (home). After all, that is the collateral being used for the loan. While you may not be making payments as in a forward mortgage, it is still a loan. HUD wants to insure that when they take possession of the home they have an asset that can be sold without unusual or extreme cost. In their own words “The financial soundness of the HECM program requires an accurate determination of property value and property condition.”

The good news is that in most cases the necessary repairs to get your home up to HUD’s standards are usually low in cost. If they aren’t there is often enough equity in the home to pay for the improvements at closing. We’ll cover this in another post. Just know that all is not lost in the event the appraiser notes deficiencies in your home.

Let’s explore a few examples. I’ve seen a number of homes with missing or loose banisters on their stairs. Another common siting is missing railings on decks. I’ve also seen a number of homes, usually older homes, with security bars on bedroom windows. All of these are easy fixes, and all of them will show up on the appraisal if not addressed in advance of the appraiser’s visit to the property.

Poor grading around the foundation, cracked windows, flaking lead paint, moisture in the crawl space, evidence of wood destroying pests, and roof leak problems are also common problems. Anything that could either present a health hazard or a structural maintenance problem either now or in the foreseeable future will likely be noted.

So, take a good look around your home. Be as honest with yourself.  If there are any conditions that could be seen as dangerous to the occupants, any conditions that could lead to future recurring and possibly increasing maintenance costs or possible catastrophic failure of the structure, they will need to be repaired. If not repaired prior to the appraisal, they will factor into the value of the home, and they will need to be repaired prior to the closing of your loan. While you may not be selling your home when applying for a reverse mortgage, it’s a good idea to treat the appraisal visit as if it were an open house. Think of HUD as the buyer. After all, they will likely be the one owning your home upon your ultimate passing.

Is a Reverse Mortgage Credit Score Driven

The question as to whether a reverse mortgage is credit driven or not comes up quite frequently. It’s just so hard to believe that there is such a mortgage that doesn’t consider your credit scores. Especially in our current environment of continuously increasing credit score requirements for forward mortgages.

The answer is essentially no. No, reverse mortgages are not credit score driven. A borrower can theoretically have a 400 credit score and still qualify to borrow using a reverse mortgage. By the same token, a borrower could have no score at all, and still qualify for a reverse mortgage.

However, (you knew there had to be one of those lurking) this being a government loan, the government wants to protect itself in the deal. Meaning, if you owe money to the government they will require you to pay them back with the proceeds of the loan. If there is not enough equity to do so, you will not be able to obtain the reverse mortgage.

So, yes, you can have late payments on any and all debt. You can have bankruptcies and foreclosures in your past. You can even owe the IRS money and still qualify for a reverse mortgage loan. You just have to have enough equity in the home to pay your current liens off assuming there are any, the closing costs, and the government any monies you owe them.

Disadvantages of the Reverse Mortgage

• There are costs associated with the reverse mortgage. They are generally in line with those of a conventional or FHA refinance and they are considerably lower than the cost of selling your home.
• Interest accrued on a reverse mortgage cannot be deducted until the loan has been paid in full.
• You do need to have enough equity in the home to facilitate the reverse mortgage. The following is a rough estimate and by no means should it be used to disqualify yourself, but generally the home owner needs to have 30% give or take 5% equity in the home. Put differently, if your current loan balance is higher than 70% of the value of your home there will need to be additional cash brought to the table.
• You still need to pay property taxes, home owner’s insurance, and any applicable HOA fees after taking out a reverse mortgage. This is not really a con but it is something of which you should be aware.
• The home will need to be appraised and while you can escrow for some items to be repaired, a home in disrepair could be unqualified for a reverse mortgage or could fall short on the necessary equity for closing.
• There is a mortgage insurance expense with a reverse mortgage as it is an FHA loan.
• The youngest homeowner must be 62 years of age or older to qualify. The calculation used to determine the amount of your loan is based on the youngest owner.
• A reverse mortgage could affect some state and federal needs based programs other than Social Security and Medicare. It’s worth a phone call to your case worker if you are a recipient just to be on the safe side.
• On purchases using a reverse mortgage there are no seller contributions allowed.
• The loan will reduce the equity in your home.