Property requirements for reverse mortgages
A lender that finances a reverse mortgage is counting on its ability to sell the property down the road to recoup its investment with interest.
Since the sale of the property is the most common way for a reverse mortgage to be repaid, its condition is usually more important to the lender — and the government agency backing the loan — than the condition of the borrower’s credit.
That’s why there are specific standards for a property that must be met for the homeowner to qualify for a reverse mortgage. When the bank or mortgage company goes to sell the property, they want to encounter as few obstacles as possible.
The assessment of the property’s qualifications will occur during the appraisal process. The Federal Housing Administration (FHA) has developed Minimum Property Standards (MSP) to guide appraisers through the process of determining property eligibility.
Those conditions include:
Type of property
Reverse mortgages are typically limited to single-family homes. However, owners of properties with two to four living units can also qualify as long as the borrower also lives on the property. Some condominium developments are also eligible.
Manufactured homes can be eligible if they are single-family homes of at least 400 square feet and were constructed on or after June 15, 1976, to conform with federal regulations. FHA considers modular housing different than manufactured housing and appraisers can evaluate modular homes the same as stick built properties.
“Unique” properties such as log homes, earth-sheltered housing and domes houses are to be evaluated and appraised on structurally soundness and marketability.
Layout and amenities
To be eligible for a reverse mortgage, homes must have adequate space for living, sleeping, cooking, and dining. There must be at least one bathroom with a ceiling height of at least six feet. The property must have working plumbing, safe drinking water, hot water, and proper sanitation. The home must have proper electric/gas utilities. Attics and crawl spaces must have proper ventilation.
FHA advises that homes subject to a reverse mortgage be durably built and resistant to weather, moisture, corrosion and fire. That includes flame retardant insulation that is installed at a height unaffected by vermin, water or soil, which means older homes insulated with newspaper may not qualify. Doors and windows must be properly installed, and caulking and sealants should be sufficient to keep out air and moisture. Paint should be lead-free and mold resistant.
Single properties only
The property subject to a reverse mortgage must be on a single parcel of land or grouped in a way that it can be sold as a single piece of property. Also, all parts of the property in question must be accessible without trespassing on another person’s property, and utilities must be available without relying on those of an adjacent property. So for example, you cannot include a maintenance building located a half-mile from the main residence as the collateral for your reverse mortgage.
Absence of hazards
The property must be safe to live in. That means no excessive pollution, radioactive materials, or poisonous chemicals affecting the site.
According to the FHA handbook for appraisers: “Defective construction, evidence of continuing settlement, excessive dampness, leakage, decay, termites, environmental hazards, or other conditions affecting the health and safety of occupants, collateral security or structural soundness of the dwelling must render the property ineligible until the defects or conditions have been remedied and the probability of further damage eliminated.”
External conditions affecting “marketability.”
FHA guidelines stipulate that appraisers consider certain conditions that may impact the property’s value and marketability. These include heavy traffic, airport noises and hazards, proximity to high-pressure gas lines and overhead electric power transmission and distribution lines, and the presence of smoke, fumes, or stagnant ponds. These conditions won’t necessarily preclude the property from qualifying for a reverse mortgage, but they could affect the appraiser’s valuation, which will ultimately determine how much you can borrow.
While there seem to be many restrictions on reverse mortgage property, the main thing to consider is: as long as the property can pass an inspection and be sold with little trouble, then it should pass FHA muster.
Also keep in mind that if the appraiser notes necessary repairs, such as roof damage, plumbing, and electrical issues, or broken windows, the lender may give you the option of attaching a repair rider to the reverse mortgage agreement. This provision stipulates that the borrower will make repairs or improvements to the home within a specified timeframe of receiving the loaned funds.