With FHA just recently announcing they are making the “Collateral Risk Assessment” program permanent, I thought this would be good time to talk about the appraisal process.
As with most home mortgages, the Home Equity Conversion Mortgage (HECM), which is the name for the FHA reverse mortgage program, requires a full appraisal. Most homeowners think the appraisal is the first step in getting a reverse mortgage. Actually, it is the third step, after counseling and application.
Since most reverse mortgages are HECM’s, we must obtain an FHA case number before we order the appraisal. This is a very important step that has to be completed in a timely order. We cannot get this prior to the homeowner signing the application and it is also key in the date we can lock the “expected rate” (this is the rate we use to determine the amount we can loan).
One of the first questions I ask people when I talk with them is what they think their home is worth. I do this so I have an idea if they have enough equity in their home to qualify. But since I am going to check comparable sales in the neighborhood, I want to know if they have a realistic view of the value as well. If not, I may need to do some education about how appraisers arrive at the value.
Generally speaking, people tend to think that county assessments are always less than the actual value. Anyone who was in the mortgage business during the latter part of the last decade know this is not the case. Assessments are beginning to catch up with actual values and in some cases even surpassing them.
I typically meet my customers and take the application in their home. It’s easier for them, but it also allows me the opportunity to see the home. I can then have a much clearer picture if the value of the home should be on the high end of value range or if there will be appraisal concerns.
Anyone getting a reverse mortgage has to be aware that their property must meet FHA standards and if I can see the home prior to the appraisal, I can point out possible concerns. For instance, if I see a deck that needs stain or paint, I can explain to the homeowner that they can do it prior to the appraiser arriving, or if they don’t have the time or money, the appraiser will write it down as a repair requirement.
With reverse mortgages, if there are repairs required, we do NOT require them to be fixed prior to closing. We can do a “repair set-aside” which allows the homeowner 6-12 months after the loan closed to get it fixed. The lender will set-aside 1.5 times the appraisers estimate and once the work is complete, will release these funds. For example, if the appraiser estimates a repair will cost $1,000, the lender will set-aside $1,500. There are additional fees such as a small repair administration fee and a fee for the appraiser to go back and re-inspect to confirm the repairs have been completed satisfactorily.
The last item I want to discuss here is something that is unique exclusively to HECM reverse mortgages (and not in a good way). It’s called “Collateral Risk Assessment” I’ve talked about this in past blog posts, but since it is now a permanent feature of the program, I want to explain it again.
Last September, HUD issued Mortgagee Letter (ML 2018-06), stating the following:
“For all HECM’s, FHA will perform a collateral risk assessment of the appraisal submitted for use in the HECM origination. Based on the outcome of the assessment, FHA may require a second appraisal be obtained prior to approving the HECM.” The Letter continues, “Where a second appraisal is required by FHA and provides a lower value, the mortgagee must use the lower value of the two appraisals in originating the HECM.”
What this means is that all Home Equity Conversion Mortgages (HECM) will have the appraisal reviewed by FHA. They have a computer system called an Automated Valuation Model (AVM), that reviews the appraisal. This is similar to what Zillow and other on-line valuation web-sites use. If the actual appraisal falls outside of certain data points (we don’t know what these are), FHA will require a second appraisal.
If there is a second appraisal required, it can add 7-10 days to the time it takes to close as well as another $600 to the cost. This happens to about 22% of my applications and as of yet, has not caused any customers to not be able to qualify for the reverse mortgages. Most of the time, the second appraisal value is within $10,000 of the first.
Please let me know if you have any questions about this. My contact information is below: