An appraisal is an opinion of market value for a piece of real estate that is developed by a licensed real estate appraiser for purposes of obtaining a home loan.
Because the HECM reverse mortgage is an FHA-insured program, the appraisal report used to obtain a HECM reverse mortgage must meet FHA lending guidelines.
The appraised value of a home is the starting point for determining how much money can be received from a HECM reverse mortgage. The appraised value establishes the maximum claim amount, which is then multiplied by a PL factor to determine the principal limit, which is the initial amount that a reverse mortgage borrower qualifies for. The principal limit is essentially the pool of cash available for the borrower’s use to pay off existing mortgages, closing costs, required property charges (such as property taxes, homeowner’s insurance, etc.), or to take as a lump sum, line of credit, or monthly payment.
If the appraisal is “subject to” repairs
If your home isn’t in the best condition, the appraiser may make their opinion of value “subject to” certain repairs being done. If the issues are severe and impact health, safety, marketability, or structural integrity (bad roof, foundation issues, mold, severe wood rot, etc.), it’s likely you’ll need to address and fix the issues before the loan can close.
If the issues are relatively minor (peeling paint, torn/broken flooring, leaky faucet, etc.), the lender may require a portion of the principal limit to be put into a repair set-aside to ensure the repairs are done after closing. Once the lender verifies the repairs are done, the funds in the repair set-aside are released back to you.
The following includes some of the most common potential repairs an appraiser may note in the appraisal report:
- Leaky or worn out roof
- Broken or inoperable windows
- Security bars with no or inoperable release latches
- Wood in contact with earth
- Infestations of insects, rodents, etc.
- Exposed or damaged wiring
- No permanent heating source
- Foundation cracks and/or settling
- No handrails on staircases with four or more stairs
- Upper level decks with no railings
- Empty pools
- Exposed or unfinished wood on exterior surfaces
- Wood rot
- Health or safety issues
- Defective or missing smoke and carbon monoxide detectors (if required by the local jurisdiction)
- Well or septic not meeting minimum distance requirements
Some reverse mortgage lenders may require that you pay the appraisal out of pocket with a check or credit card. If this happens, be sure to ask if they’re willing to pay it through the loan instead. A typical lender is usually more concerned about losing your business than paying appraisal fees through closing. The worst they can say is no, right?