There are several things the savvy consumer needs to know about home repair and home equity conversion mortgages (HECM). In some cases, home repairs may be required in order to obtain a reverse mortgage loan. This is because the home is the collateral for the loan and since many reverse mortgages (known as HECMs) are FHA-insured, a home’s lack of durability can increase the government’s financial risk. To reduce that risk, the home must meet FHA minimum property standards.
Fortunately, if home repairs are required for a reverse mortgage, they can sometimes be completed after closing, using funds from the reverse mortgage. This would be done by creating a “repair set aside”, which is typically 150% of the repair estimate plus a repair administrative fee. A repair set aside will be listed on the final settlement statement, also called the HUD1.
What’s important to remember is that required repairs are only to ensure continued functionality. If you are approached by an individual or a company offering to do remodeling that is financed through a reverse mortgage loan, be cautious. A reverse mortgage loan can be a wonderful source of funds for remodeling projects, but as with any major expense, you should pay for materials once they arrive and pay for labor once the job is complete. Be very cautious about ever providing cash in advance and be sure to get a written contract for the work. Your local attorney general’s office may have additional tips for avoiding home repair fraud.
A September 2009 press release from the Illinois Attorney General’s Office highlights a case where $1.3 million was swindled from elderly homeowners through luring unsuspecting borrowers into home repair contracts that they couldn’t afford and didn’t necessarily need. The lawsuit charges that consumers were convinced to endorse their “cashout” checks over to the defendant to pay for home repairs, only to discover that construction was not started, was substandard, or was not completed. Homeowners were then left with outstanding loan balances for unfinished work. To help consumers avoid home repair fraud, the Illinois Attorney General’s Office has published Tips to Avoid Home Repair Fraud. Similarly, the National Association of the Remodeling Industry has published a top ten list called Avoiding Home Improvement Scams.
Remember, repairs that are required for a reverse mortgage loan will be to ensure continued functionality. They will be listed on the underwriter’s conditional commitment, which will include the repair estimate total and will list the repairs needed.
The response above is not intended to be anything other than the educated opinion of the author. It should not be relied upon as financial advice.