Understanding reverse mortgage repair riders
Seniors who go through the reverse mortgage process often have lived in the home for many years, long enough to have it completely paid off or almost paid. During that time, however, many have neglected parts of the home that are in need of repair. In fact, making repairs is a common reason for taking out a reverse mortgage.
While reverse mortgage loans are a potential source of funds to make those repairs, in some cases the condition of the home can impact the terms of the loan and even whether a lender will grant a reverse mortgage.
During the application process, your home will be appraised just as it was when you purchased it. The appraiser bases much of the examination on health and safety requirements outlined in the Department of Housing and Urban Development’s (HUD) Minimum Property Standards.
Often during the process, the appraiser will note necessary repairs, such as roof damage, plumbing, and electrical issues, or broken windows. Lenders do not want to take on the risk of financing a property that does not meet building and safety codes. But they also acknowledge that most borrowers do not have the money to make repairs; that’s why they’re taking out a reverse mortgage in the first place.
In these situations, the lender will attach 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.
Failing to make the repairs as stipulated could cause the borrower to default on the loan. That means if you’re receiving monthly payments from a line of credit, the payments will cease. If you received a lump sum amount, the loan would be called, and you will immediately owe the balance of the loan.
Most repair riders stipulate that the repairs be made within six months of closing. HUD guidelines require completion of repairs with a year of closing; lenders must request an extension if the work is still in progress at the one-year mark. That means borrowers should schedule the repair work as soon as possible to avoid the risk of default.
The lender will set aside funds for repairs
When a repair rider is attached to a reverse mortgage, the loan will include what’s called a repair set-aside. This is a portion of the reverse mortgage funds that will be designated specifically for the purpose of funding home repairs.
To determine the set-aside amount, an estimate of the needed repairs will be made. The lender will then add 50 percent above that estimate to account for any cost overruns and follow-up inspections to ensure the work was done properly. So, if a home repair is estimated to cost $5,000, the lender will set aside $7,500 of your reverse mortgage funds to pay for the repair.
Typically, the amount you can set aside for repair work is 15 percent of the home’s appraised value or the Home Equity Conversion Mortgage (HECM) cap of $625,000, whichever is less. So, if your home is appraised at $300,000, your set-aside limit will be $45,000 (300,000 x 0.15). If the repairs on your home will exceed the set-aside limit, you will have to make them before you can qualify for the reverse mortgage.
Lenders usually will not allow borrowers to fix the damages on their own or to use friends or family. In most cases, a licensed contractor will be required to submit a bid for the work.
Once the work has been completed, the lender will have it inspected. Once they are satisfied the repairs have been made, any funds remaining from the set-aside amount will be transferred to the reverse mortgage line of credit. Those funds become available to the borrower to use for any purpose.