The Reverse Mortgage Program is a Federal Housing Authority (FHA)-approved mortgage program that allows seniors, age 62 and older, to take out a portion of the accrued equity in a house. Funds can be used for virtually any purpose such as supplemental income, home improvements, a dream vacation, or medical expenses. Unlike conventional home equity mortgages, the borrower is not required to make any repayments on a reverse mortgage as long as the borrower uses the house as the principal residence. Repayment of the reverse mortgage is made when the house is sold.
Appraisal Requirements for Reverse Mortgage
One of the more frequently asked questions is how the property value is determined for a reverse mortgage In fact, there is no great mystery to determining the value of a reverse mortgage. It is done in the same manner as a regular “conventional” home equity mortgage.
The caveat is that because the vast majority of reverse mortgages are FHA insured, the appraisal work must be done by an FHA-approved appraiser. Because the house constitutes the “sole collateral” used to secure the reverse mortgage, it is critical that the appraisal is accurate and reflects the true value of the house. In addition, because the reverse mortgage is FHA insured, the property must meet FHA property standards.
What Is a Comparable?
The FHA approved appraiser will do a “comparable.” That is, the appraiser will compare the value of the appraised property to properties (comparables) that have recently sold in the area. “Sold in the area” is a rather lose concept that is contingent upon population density. Appraisers doing an appraisal on a typical suburban home with a typical suburban population density will look for "comparables" within a 1.5- to 3-mile radius of the subject home.
The FHA is enforcing very strict guidelines for the appraiser to follow in doing the appraisal. The house must be similar to comparable “sold” properties in the area in terms of style and amenities.
What Is Recent Sale?
The comparable house that sold must be a recent sale. Again, this is another lose concept. The robustness of housing sales tends to vary with the condition of the economy. When the economy is sluggish, housing sales tend to be sluggish.
Typically, a comparable house that sold in the area, say, a year and a half ago would not be an ideal house upon which to do a comparable. However, in a sluggish economy where housing sales are sluggish, that house may be “the only game in town.” At the end of the day the decision on what constitutes a recent sale is a judgment call on the part of the appraiser and the funding company.
Meeting FHA Guidelines
Many seniors find themselves caught up in a Catch-22 dilemma because the property must meet FHA minimum property standards to obtain a reverse mortgage. Many older homes may need repairs to meet the FHA reverse mortgage requirements such as roofing, electrical, plumbing or lead-based paint issues beyond the ability of the borrower to correct with available out-of-pocket funds.
The good news is that FHA recognizes the potential for these kinds of problems and has made provisions that will allow for the repairs to be made from the settlement proceeds, typically within a maximum of six months after funding. Any needed repairs to meet FHA requirements are noted by the appraiser in the appraisal report. Estimates are then obtained from “reputable” contractors to do the repairs. Finally, the needed funds are held in escrow to be drawn down as the repairs are made.