When a new reverse mortgage closes, the appraiser and underwriter may have identified repairs to the property that are required to be completed to bring the property into compliance with Federal Housing Administration (FHA) or investor standards. When this occurs, a portion of the loan funds available to the borrower are put in a repair set aside (RSA) to be used throughout the process to complete the repairs. Shortly after the loan is boarded with the servicer, they will send an introductory instruction letter to the borrower and continue to work closely with the borrower throughout the process. The borrower, in turn, should provide regular updates to the servicer about the progress.
What is the Deadline Date to Complete Repairs?
Generally speaking, borrowers have up to 12 months after the loan closing date to complete those repairs, which are outlined on the repair rider to their loan agreement. Repairs listed in the rider are required to be completed by the expected completion date shown in the rider, which is set by the lender and generally spans between 6-12 months after the closing date. For HECM loans with an expected completion date set for less than 12 months after closing, the borrower may request up to two 90-day extensions. However, extensions are subject to approval from the investor or the U.S. Department of Housing and Urban Development (HUD) and are not available to extend beyond 12 months after the closing date.
Paying for the Repairs
An initial disbursement of funds to pay for materials—with receipts and delivery to the home/job site—may be made, with remaining funds disbursed as on-site inspections confirm that partial and/or complete work has been done satisfactorily to meet FHA or investor standards. Checks will be issued payable jointly to the borrower and the contractor and mailed to the borrower. If the borrower is satisfied with the contractor’s work, the borrower simply needs to sign the check over to the contractor for payment.
What is Required to Close Out the Repairs?
An Affidavit & Lien Waiver will be required from the contractor or contractors to close out repairs. Or, if the borrower completed the repairs without a contractor, a Homeowner’s Certification Form will be required. These forms can be obtained from the servicer, and in some cases, are available on the servicer’s borrower-facing website.
What If There Are Excess Funds in the RSA?
Upon successful completion and inspection of all required repairs, the remaining funds can be accessed by the borrower in the line of credit—if it is an open-ended loan. However, if the loan is closed-ended, the remaining funds in the RSA will not be available to the borrower—the funds will remain unborrowed and will not be added to the loan balance.
What if the Borrower Does Not Complete Repairs In a Timely Manner?
If a borrower does not make the agreed-upon repairs by the expected completion date, or by any approved extension date, any available loan funds—including monthly scheduled payments and line of credit disbursements—are required to be suspended until the repairs are made and verified by an inspector as sufficient and complete. The funds in the RSA, however, remain accessible for the borrower to use to complete the repairs.
How Can a Loan Officer Help?
It is important to have a conversation with your borrowers before closing to make sure they understand exactly what repairs are required, what the deadline is to complete those repairs and to confirm their understanding of the overall process. Borrowers are allowed to hire a contractor or make the repairs themselves but, in either case, starting the process immediately is key, as external factors—such as inclement weather and availability of contractors and materials—can delay well-intentioned plans. Also, be sure borrowers understand that all work completed must be confirmed by a HUD-approved inspector and the servicer will order the inspections when the borrower communicates that either partial or complete repairs have been made.
Additionally, please stress to them that disbursements from the loan will be suspended if they are not able to complete the repairs by the applicable deadline date. Finally, please let them know that the servicer is there to assist should they have questions or run into any hurdles along the way.
(Editor’s note: This column was submitted courtesy of Celink.)
