The Federal Housing Administration has helped families obtain sustainable mortgages since its inception in 1934. In 1989, the Department of Housing and Urban Development introduced the agency's first reverse mortgage known as the Home Equity Conversion Mortgage, or HECM. HUD selected 50 lenders by lottery to originate the first HECM loans. All FHA-approved lenders have been able to fund the loans since 1991. Appraisal guidelines are instrumental in ensuring the survival of FHA's reverse mortgage insurance.
HECM reverse mortgages, also known as Section 255 loans, allow seniors ages 62 and older to access their home's equity. Homeowners borrow against their home's value, which is determined by an FHA-approved appraiser's inspection of the home and comparative market analysis. HECM loans are made on homes with no existing mortgage or limited outstanding debt. Eligible properties must consist of a maximum of four dwellings and be owner-occupied. Only appraisers listed on HUD's FHA Roster may conduct appraisals for HECM.
The same appraisal standards for FHA's 203(b) insurance -- the agency's most widely used program -- apply to the HECM valuation process. Appraisal guidelines are found in HUD Handbook 4150.1, and guidelines unique to HECM mortgages are found in Chapter 3 of HUD Handbook 4235.1.
FHA guidelines require that appraisers denote any deficiencies and repairs needed to meet HUD's Minimum Property Standards for insurance. HECM mortgages may also be taken out on FHA-approved condominium units and manufactured homes that meet HUD standards.
The maximum reverse mortgage amount is based in part on the home's appraised value, its equity (its value less any existing liens) and the amount expected on the future sale or refinance of the home. Appraisers report their findings on a Uniform Residential Appraisal Report. They must analyze the site, which includes the neighborhood, and economic factors that affect the home's marketability as well as the property's interior and exterior structure. They must denote flaws that may affect the occupants' health and safety or structural soundness of the home, such as faulty or outdated electrical, plumbing, mechanical and septic systems and defective paint surfaces. Site flaws include inadequate access to the home such as streets without all-weather surfaces.
Repairs reported on the appraisal must be remedied or further inspected by an expert in the given field. For example, an appraiser may report signs of damage to the structure by wood-destroying pests but request an inspection by a termite specialist for an analysis of the damage. The appraiser may then require repair of the active infestation and damage incurred.
The appraiser may not reject a property for HECM insurance. If required repairs amount to more than 30 percent of the home's maximum claim amount, the Valuation Branch of the local HUD office must make the final determination of eligibility, says HUD Handbook 4235.1.
- HUD: Reverse Mortgages (HECM)
- HUD: Handbook 4235.1: Property Analysis
- HUD: Handbook 4150.1: General Information
- Reverse.org: History of Reverse Mortgages
- HUD: FHA Reverse Mortgages (HECMs) for Consumers
- HUD: MPS Supplementing Model Building Codes
- HUD.GOV. "Home Equity Conversion Mortgages for Seniors." May 2, 2020.
- Federal Trade Commission. "Reverse Mortgages." May 2, 2020.
- American Advisors Group. "How a Reverse Mortgage Can Help You Buy a New Home." Accessed May 2, 2020.
- Consumer Financial Protection Bureau. "Can I Use a Reverse Mortgage Loan to Buy a Home?" Accessed May 1, 2020.
- ReverseMortgageGuides.org. "HECM For Purchase." Accessed May 1, 2020.
- National Reverse Mortgage Lenders Association. "HECM for Purchase." Accessed May 1, 2020.
- Consumer Financial Protection Bureau. "When Do I Have to Pay Back a Reverse Mortgage Loan?" Accessed May 2, 2020.
Karina C. Hernandez is a real estate agent in San Diego. She has covered housing and personal finance topics for multiple internet channels over the past 10 years. Karina has a B.A. in English from UCLA and has written for eHow, sfGate, the nest, Quicken, TurboTax, RE/Max, Zacks and Opposing Views.