Appraisals & Reverse Mortgages
March 16th, 2008
- Appraisals, Not Income, Key To Reverse Underwriting
- Should You Appeal Property Taxes?
- When Do You Have To Pay Back A Reverse Mortgage?
- Should I Apply for a Reverse Mortgage or Settle Debt?
- Reverse Mortgages & Shared Appreciation
One of the most common questions from senior borrowers and their children alike is how the property value is determined for a reverse mortgage. This is a topic that requires a bit of discussion so I’ll try to unravel this great mystery here.
For most reverse mortgages (based on volume, over 90% of the reverse mortgages done are the FHA insured HECM), the appraisal will be done by an FHA approved appraiser. The purpose of the appraisal is two-fold:
First to determine the property value for purposes of the loan (remember, on a reverse mortgage, the property is the sole collateral — no other assets of the borrower are used); and
Second, to be sure that the property meets FHA property standards.
The appraiser will compare the subject property (yours) to recent comparable SALES in the area. The appraiser must adhere to FHA guidelines when completing the report. For instance, comparable properties should be as close in proximity and style to the subject property as possible. In addition, the “comparable” should be a recent sale. So a home down the street from you that sold 18 months ago is probably not a good choice in today’s market. In addition, if you have a rancher style home on a half-acre lot, then a condominium is not considered a good comparable.
As mentioned earlier, the property must meet FHA minimum property standards in order to obtain a reverse mortgage. But if you have been reading these posting with any frequency, you know that many seniors use reverse mortgage funds to make needed improvements to the property. There are provisions that make this possible. The appraiser can note any “deficiencies” on the report and under certain circumstances; these deficiencies can be corrected with the use of reverse mortgage funds after settlement. The funds needed for repairs can be escrowed and then the repairs can be made within a designated amount of time (six months is typical).
For example, items such as exterior painting, roofing repair, and some plumbing issues may cost more than the borrower can pay out-of-pocket prior to settlement. In that case, the lender can arrange for an escrow and hold back the required repair funds at closing. Then, the borrower can close on the reverse mortgage and do the repairs later. This is indeed an appropriate use of the reverse mortgage proceeds.
This overview is very basic and your reverse mortgage consultant can guide you on the specifics of these provisions.
Contributor Sue Haviland — based in Baltimore, MD — has been a reverse mortgage specialist for more than five years.