Reverse Mortgage Glossary
A repair set-aside reserves a portion of the proceeds from a HECM reverse mortgage to help make sure minor repairs are completed after loan closing. Once the repairs are completed, the funds in the repair set-aside are released back to the borrower.
The HECM reverse mortgage is an FHA-insured and regulated program, so homes that are used as collateral for the loan must be up to FHA lending standards. If the appraiser notes major health, safety, marketability, or structural issues with the home, such as leaky roof, bad foundation, mold, water in the basement, etc., it’s a good bet the lender will require the problem to be fixed before the loan can close.
However, if the issues are relatively minor, such as peeling paint, exposed untreated wood, leaky faucet, etc., it’s possible the lender will allow the repairs to be completed after closing using a repair set-aside. The lender will hold back enough funds in the repair set-aside to cover the estimated costs of the repairs, and once the repairs are done, the funds in the repair set-aside will be released back to the borrower.
As long as the repairs don’t impact structural integrity, health, safety, and marketability, and don’t exceed 15% of the maximum claim amount (appraised value for most borrowers), they can likely be completed after the loan closes with a repair set-aside.