I always prefer to meet clients at their homes; my internal alarm goes off when a senior is adamant about meeting at my office or elsewhere. When that happens, more often than not, I’m going to have a property issue.
REQUIRED “REPAIR SET-ASIDE” GUIDELINES
Many seniors have lived in their homes for decades and minor deferred home repairs, such as missing chimney flashing, can turn into major expenses. The potential for home repairs should be discussed with all clients to educate them about the process. They should be aware that the exact list of required repairs is not usually known until after they have incurred the cost of counseling and appraisal.
Although this list is by no means exhaustive, common repair items include ceiling water damage, which is a sign of a leaking roof, visible roof issues, water staining or standing water in the basement, cracked windows, rodent droppings, insect damage, mold, and everyone’s favorite: peeling paint. Fortunately, unlike forward mortgages, most repairs may be completed after the loan closes. A repair set-aside is established, the funds necessary are escrowed from the proceeds of the reverse mortgage and a repair rider is added to the loan agreement.
However, at the underwriter’s discretion, certain repairs that are safety or hazard issues must be completed prior to closing. For example, my clients have been required to fix deck railings or block the door leading to the deck, install handrails and secure pool fencing. The upfront, out-of-pocket expense is challenging for some seniors, but the liability risk would be too great if the loan closed and an injury occurred before the repair was completed.
For most reverse mortgage lenders, required repairs are determined by the underwriter based on the appraisal. Sometimes additional inspections are required; for example, a structural engineer may be needed if there are sagging floors or cracked foundations. The repair estimates must come from appropriately licensed contractors, with the exception of minor repairs noted by the appraiser.
THE REPAIR ESTIMATE GUIDELINES ARE STRAIGHTFORWARD AND GENERALLY INCLUDE:
-The contractor must meet all state and local requirements.
-The contractor must provide only one bid per repair item.
-The bid must be specific and detailed to the repair.
-The bid must be on company letterhead with the name of the contractor’s representative, as well as his address, phone number, license
-The bid must be signed and dated by a company representative.
Most lenders prohibit do-it-yourself repair work and family-related contractors. The risk of the work not being completed is too great. The repair set-aside is calculated as 150 percent of the total contractor and appraiser estimates. The additional amount is reserved to cover any potential repair shortfall. Once the work is complete, any remaining funds are added to the reverse credit line. The maximum repair set-aside is typically 15 percent of the maximum claim amount. This has been problematic for me in cases where a senior had no mortgage but was unable to close because the repairs exceeded the limit.
Seniors must be informed that the lender will also charge a repair administration fee of 1.5 percent of the total bid, usually with a minimum fee of $50. Once the work is completed, a final inspection and associated fee conclude the repair set-aside process. You should discuss with your reverse lenders and appraisal management companies their particular repair guidelines.
LESSONS FROM THE FIELD
Yes, it’s critical to understand underwriting guidelines, but I’m always focused on how guidelines will impact the ability of my borrowers to close their loans. Hopefully you’ll find the following examples and their solutions helpful.
Repairs exceed the 15 percent maximum claim threshold and there is no homeowner’s insurance
We had a borrower with a “skylight” in her bedroom. The problem was, the “skylight” was literally a hole in her roof. When it rained, the water would run down the walls, resulting in major damage, including mold. She had no mortgage and no insurance. It was unlikely we were going to be below the 15 percent repair limit and gave up trying once we learned she had no property insurance and none was available because of the house’s condition. My solution was to engage a trustworthy contractor willing to complete the entire job with no upfront money and to be paid after the loan closed.
Repairs are less than 15 percent of the maximum claim, but there are insufficient funds due to the size of the current mortgage
I’m not surprised when this occurs because a senior with a high current mortgage is often struggling to make ends meet, let alone have funds available for home repairs. Sometimes the actual repair cost or the 150 percent set-aside amount will exceed the maximum available reverse funds. I’ll encourage my client to involve other family members to fund the repairs. From a financial aspect, this may minimize future financial support from family members, protect the property’s equity, and in the event of moving, result in higher resale value.
I’ve had more than one client with a hoarding habit, which may cause valuation issues. One might not think of hoarding as a repair set-aside issue, but it becomes apparent when there are hundreds of cardboard boxes stacked in a wet basement acting as giant sponges that create a horrendous smell of mildew and mold. My approach is to invite the family to attempt a heart-to-heart conversation with the senior about the problem.
On a lighter note, I had a wife keep telling me she would not schedule the appraisal until her attic was cleaned out and I kept telling her that was not a requirement. This went on for months until one day she called and said her husband finally cleaned out the attic. Again, I told her that was never a requirement, at which point she said she knew that all along but had told her husband it was in order to get him to empty out all of his clutter.
OPTIONAL HOME IMPROVEMENTS
Not all property condition issues are negative or required. I’ve had several clients with beautiful homes who want to make upgrades. They’ve decided to remain in their home for the rest of their lives and want to redo the kitchen, a bathroom, or finally add that three-season sunroom instead of moving to Florida.
I’ve met with contractors to educate them about senior home issues. One common example is the need to make a home handicap-accessible. Sometimes, seniors settle for the less intensive solutions: installing an unattractive sloping wheelchair ramp, turning the lower-level family room into a bedroom, or installing a curtain instead of a door to let a wheelchair pass into the bathroom. For seniors whose homes are in need of repair, a reverse can offer the funds necessary to make such changes. A sloping brick walkway, a stair-lift to the second floor, refitted door knobs, proper kitchen and bathroom wheelchair counter heights and other handicap-friendly features can not only help improve the quality of life, but may actually increase the value of the property when the home is sold to future seniors.
The key to repair set-asides or optional home improvements is to make sure every client is fully educated about the requirements and process. Related loan processing stress is always minimized when working with a knowledgeable senior.