If you’re applying for a reverse mortgage, your home will have to be professionally appraised before the lender can determine how large of a loan it might offer you. Here is what you need to know about the reverse mortgage appraisal process.
- If you apply for a reverse mortgage, the lender will arrange for a professional appraisal.
- The appraisal is a major factor in determining how large a loan you may be eligible for.
- If you disagree with the appraisal, you can challenge it.
What Is a Reverse Mortgage?
A reverse mortgage is a type of loan that allows homeowners to access the equity they have accumulated in their home without having to sell it. They can receive the money as a lump sum, monthly payments, a line of credit to draw on as they wish, or some combination. They (or their estate) don’t have to pay off the loan until they die, sell the home, or move out.
The Federal Housing Administration (FHA), part of the U.S. Department of Housing and Urban Development (HUD), insures reverse mortgages that are issued by FHA-approved lenders. These loans are formally known as home equity conversion mortgages (HECMs).
Some private lenders offer their own versions of reverse mortgages as well. Those loans, often referred to as proprietary reverse mortgages, are not government-insured and can have different qualification requirements and lending limits.
In addition, some state and local agencies and nonprofit organizations offer single-purpose reverse mortgages, typically for low- and moderate-income homeowners. As their name implies, the money must be used for a particular purpose, such as home repairs or to pay property taxes.
Who Qualifies for a Reverse Mortgage?
To qualify for a reverse mortgage insured by the FHA, you must be at least age 62. Among other requirements, you must also:
- Occupy the property as your principal residence
- Own the property outright or have paid off a “considerable” portion of any debt on it
- Have adequate financial resources to keep up with the home’s property taxes, insurance, and other fees
As part of the loan application process, the lender will review your credit history and verify your income, assets, and monthly living expenses. It will also check whether you have paid your real estate taxes and homeowners insurance premiums on a timely basis. That also includes flood insurance if you have it.
What Homes Can Qualify for a Reverse Mortgage?
The home itself must also meet certain requirements. For example, it must be either a single-family home or a two- to four-unit home with one unit occupied by the borrower, a HUD-approved condominium project, an individual condominium unit that meets the relevant FHA requirements, or a manufactured home that meets the requirements.
Before you can take out an FHA-sponsored reverse mortgage, you must participate in an information session with a HUD-approved HECM counselor.
How Much Can You Borrow?
The amount that you will be able to borrow will depend on your age, current interest rates, and the appraised value of your home. The maximum FHA-insured HECM is currently $970,800.
Proprietary reverse mortgages with higher limits are also available and are commonly referred to as jumbo reverse mortgages.
How the Appraisal Process Works
To determine how large of a loan you could be eligible for, your lender will require a professional appraisal of your home. For a government-insured reverse mortgage, the lender must use an FHA-approved appraiser.
The appraisal process for reverse mortgages follows the same steps as a typical home appraisal. The appraiser will evaluate the home inside and out, as well as the surrounding neighborhood, then look for comparables (similar homes in that area that have sold recently) to help determine its value on the market. The appraiser may make measurements, take photographs, and review any relevant legal documents.
The appraiser will also make note of any repairs or other work that is necessary to bring the home up to HUD’s minimum property standards. If substantial repairs are required, the homeowner may have to complete them before receiving the loan. If repairs would cost less than 15% of the maximum claim amount (essentially, the most for which HUD would be responsible if the borrower defaults), the lender may issue the loan and allow the homeowner to complete them after that.
While the appraiser works for the lender, the borrower has to pay their fee. That typically will be several hundred dollars. In some instances, the lender or HUD may require a second appraisal.
The appraiser should provide copies of their appraisal to lender, who will forward a copy to the homeowner. The Equal Credit Opportunity Act (ECOA) requires creditors to automatically send a free copy of home appraisals and all other written valuations on the property after they are completed, regardless of whether credit is extended, denied, incomplete, or withdrawn. If the homeowner disagrees with the appraisal, they can challenge it by filing a request for reconsideration of value with the appraiser, along with comparables that they believe more fairly represent the home’s value. The appraiser is required to review that information, but it’s up to them whether to make any changes as a result.
How Long Is an Appraisal Good for?
An appraisal is typically good for 120 days, but in some cases, an additional 30-day extension may be available.
Can I Hire My Own Appraiser?
You can if you wish, but the verdict of the lender’s appraiser will be the one that counts in terms of obtaining a reverse mortgage and determining its amount.
What Are the Fees for a Reverse Mortgage?
In addition to the appraisal fee, borrowers can expect to pay an origination fee to the lender (not to exceed $6,000 in the case of a government-insured mortgage) and a variety of closing costs. Those can include inspection, title search, and recording fees, as well as an initial insurance premium equal to 2% of the loan balance if the mortgage is government-insured. Aside from the insurance, fees can vary from lender to lender, making it
worthwhile to shop around. Collectively, these fees can add up to a considerable sum, which is one of the downsides of a reverse mortgage to take into consideration.
The Bottom Line
Reverse mortgages are based, in part, on a home’s appraised value. If you’re applying for a reverse mortgage, your lender will arrange for a professional home appraisal. If you disagree with the value that the appraiser puts on your home, you can dispute it.