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.

Advantages of the Reverse Mortgage

• The reverse mortgage allows you to convert home equity into non-taxable income without having to sell your home
• The reverse mortgage allows may allow you to convert that highly illiquid and passive asset to a very liquid asset that can be actively invested.
• With a reverse mortgage you never have to pay the loan back as long as you live in the property as your primary residence, keep the home maintained, and pay your taxes, insurance and HOA dues (if applicable).
• You will never, under any circumstances, owe more than your home is worth. Neither will your heirs in the event you leave the home to them in your estate.
• You will never again have a mortgage payment.
• You can sell your home or refinance out of a reverse mortgage in the future. You will need enough equity or cash on hand for either situation, and in the event you wish to refinance you would likely need to qualify for the new loan.
• You can place a reverse mortgage on an owner occupied income property of up to four units.
• You can use the proceeds of the loan to make maintenance repairs to your home to get it up to HUD appraisal standards.
• The loan is paid in full, along with any capital gains upon the homeowner’s death.
• There are no income or credit requirements for a reverse mortgage. This being said, a credit report is pulled and if you owe money to the federal government it will need to be paid in full.
• You can purchase a new home with a reverse mortgage without income or credit requirements.
• The reverse mortgage note has no recourse. This means the lender cannot seek assets other than the available equity in the home for repayment of the loan. Again, the borrower and their heirs will never owe more than the home is worth.
• In a falling equity environment, the lender is the only party with risk of asset devaluation.
• N0t only will you be rid of your current monthly payment, but in many cases you may actually have the ability to structure the loan to pay you a monthly amount.
• Cash flow from the reverse mortgage will not affect social security and Medicare.
• There are no prepayments penalties
• All closing costs can be paid for with proceeds from the loan assuming there is sufficient equity to do so.

Reverse Mortgage Pros and Cons

After doing loads of research about what it is people seeking reverse mortgage information are looking for, it has become clear that the one subject most important to information seekers is that of the reverse mortgage pros and cons. More specifically, most people are looking for information of reverse mortgage cons.

Why wouldn’t you have questions. After all, it is a mortgage that claims you don’t have any monthly payments. In many cases it may even pay you! Those claims run counter to everything we’ve ever known about a mortgage. With a forward mortgage, if you don’t make every payment month after month, the lender will kick you out and take your home. How then can it be that with the reverse mortgage, you can live in your home for the rest of your life and not ever have another payment?And what’s this about getting money every month?

Well as the list of pros and cons for the reverse mortgage are limited, it won’t be the sole purpose of this blog. However, I will do my best to shed light on all of the pros and cons of the reverse mortgage that I can think of. As time passes I hope to accumulate enough information that it will answer all possible questions, allay all fears and bring certainty to you regarding whether or not a reverse mortgage is the best financial move to make.

If you would like to be updated on the latest news and my latest posts of information regarding the reverse mortgage please sign up for email updates in the lower right hand column. Your information will never be shared and I’ll do my best to always provide you with information you find useful.