A repair set-aside carves out a portion of the proceeds from a HECM reverse mortgage to ensure required repairs are completed after closing. Once the repairs are confirmed to be complete, the funds in the repair set-aside are released back to the borrower.
Why do lenders required a repair set-aside?
The HECM reverse mortgage is an FHA-insured and regulated program. FHA wants to make sure your home is safe and in reasonably good condition and will serve as good collateral for the loan. 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 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.
If your lender requires a set-aside
If your loan was closed with a set-aside for repairs, be sure to complete the repairs and let your servicer know as soon as possible. Your servicer will confirm the repairs are complete and release the funds in the set-aside back to you. If the repairs aren’t completed within 12 months, HUD authorizes your lender to freeze any available proceeds in your reverse mortgage until the repairs are complete.