One of the initial steps in the loan application process is having appraisals for a reverse mortgage performed on the home to determine the market value. This is an essential step as the appraisal value is one of the key factors in determining the amount of proceeds distributed for a reverse mortgage.
FHA Reverse Mortgage Appraisal Requirements
Homeowners considering a reverse mortgage solution sometimes want to know about the reverse mortgage appraisal requirements.
First appraisals for a reverse mortgage and FHA collateral risk assessment
In compliance with the HUD regulations implemented in October of 2018, reverse mortgage lenders are required to submit all HECM appraisals to the FHA for a collateral risk assessment. Appraisals for a reverse mortgage submitted to the FHA is assigned a specific Case Number. The goal of the collateral risk assessment is to determine if the accuracy or correctness of the appraised value of the property intended to be mortgaged.
Appraisals for a reverse mortgage can take anywhere from 2-7 days, depending on how busy the appraisal company is. Subsequently, ordering a second appraisal will lengthen the reverse mortgage process. However, based on data collected by the HUD, the collateral risk review and second appraisal requirements are necessary given that about 40% of homes were being overvalued by appraisers prior to implementing the new regulations.
These regulations are intended to reduce risk to the Mutual Mortgage Insurance Fund, which is a federal fund that insures mortgages guaranteed by the FHA. Borrowers fund this reserve through a one time upfront premium, as well as annual mortgage insurance premiums. HECM loans that are covered by the Mutual Mortgage Insurance Fund are protected against both lender failure (which assures borrowers of the continuation of their HECM whatever happens to their lender) and risk of loss at the time of foreclosure (which assures the lender’s recovery of the HECM loan balance even if the mortgaged property has less than adequate value at the time of foreclosure).
When second appraisals for a reverse mortgage are necessary
In the course of its collateral risk assessment, if the FHA determines that the value is overestimated, the questioned appraisals for a reverse mortgage will be flagged and a second appraisal will be required.
As for proprietary and jumbo reverse mortgages, if the appraised value exceeds $2 million, a second appraisal is always required regardless of the collateral risk assessment. In these situations, the reverse mortgage process may not proceed until the reverse mortgage lender orders the second appraisal.
A second appraisal may also be ordered if the borrower is not satisfied with the initial value or if the borrower has taken on new debts since the first appraisal. Under these circumstances, the same rules still apply for HECM borrowers. Such that the appraisals must be FHA approved, the borrower is responsible for payment, and the lower of the two appraisal values must be used.
Finally, a second appraisal may also be required if too much time has elapsed since the first appraisal was complete. If no extensions are granted, an appraisal is typically good for 120 days (4 months) when done for a reverse mortgage. Because of this time limit, it is important to keep the process moving after the appraisal results come in and are approved by the FHA.
The HUD policies make it clear that whenever a second appraisal is ordered for a HECM, the borrower is responsible for payments associated with this action. However, the cost may be financed into the HECM loan.
It is also important to note that when a second appraisal is ordered, the lender is required to use the lower of the two in determining proceeds.