REVERSE MORTGAGE - HECM LOAN - Guidelines And Procedures

WHOLESALE DIVISION

HECM GUIDELINES
AND
PROCEDURES

HECM Guidelines and Procedures
Page 1 of 71
Last Revised: September 26, 2008

Contents

HECM (FHA/HUD PRODUCT)........................................................................................................ 2

PLAN OVERVIEW ............................................................................................................................. 8

INTEREST RATE OPTIONS AND CALCULATIONS ....................................................................... 8

EQUITY CALCULATIONS ................................................................................................................ 9

APPLICATION DOCUMENTS .......................................................................................................... 9

SPECIAL STATE RESTRICTIONS................................................................................................... 15

ORIGINATION FEE AND MIP ....................................................................................................... 15

COUNSELING.................................................................................................................................. 15

GENERAL COUNSELING GUIDELINES ........................................................................................ 16

COUNSELING THE BORROWERS’ REPRESENTATIVES....................................................................... 17

GUIDELINES TO PROCESSING THE LOAN ................................................................................. 17

PENALTIES FOR NON‐COMPLIANCE .......................................................................................... 17

ALLOWED ACTIVITIES PRIOR TO COUNSELING...................................................................... 17

PROHIBITED ACTIVITIES FOR COUNSELORS .................................................................................. 17

CERTIFICATE EXPIRATION DATE ............................................................................................... 18

SOURCES OF COUNSELING.......................................................................................................... 18

Page 2 of 71

USPS.COM....................................................................................................................................... 19

FHA, LDP, & EPLS........................................................................................................................... 19

FHA CONNECTION (OR CHUMS)............................................................................................ 19
CASE NUMBER ASSIGNMENT......................................................................................................... 19
CASE NUMBER EXPIRATION ......................................................................................................... 19
CAIVRS CLEARANCE................................................................................................................... 19
LDP AND EPLS LISTS................................................................................................................... 21

CREDIT ............................................................................................................................................ 21

ORDERING THE CREDIT REPORT ................................................................................................. 21

BANKRUPTCIES.............................................................................................................................. 21

CHAPTER 7 BANKRUPTCIES.......................................................................................................... 21
CHAPTER 13 BANKRUPTCIES ........................................................................................................ 21

FORECLOSURE............................................................................................................................... 22

TAX LIENS ....................................................................................................................................... 22

STUDENT LOANS ........................................................................................................................... 23

OUTSTANDING MORTGAGES ...................................................................................................... 23

JUDGMENTS ................................................................................................................................... 23

IDENTITY ........................................................................................................................................ 24

TRU‐ALERT ..................................................................................................................................... 24

OFAC ................................................................................................................................................ 24

APPRAISAL...................................................................................................................................... 25

Page 3 of 71

SUBJECT SECTION ....................................................................................................................... 25
NEIGHBORHOOD SECTION .......................................................................................................... 25
SITE SECTION ............................................................................................................................. 25
IMPROVEMENTS SECTION............................................................................................................26
SALES COMPARISON APPROACH SECTION .................................................................................... 27
RECONCILIATION SECTION.......................................................................................................... 27
ADDITIONAL COMMENTS SECTION............................................................................................... 27
COST APPROACH SECTION .......................................................................................................... 27
PLANNED UNIT DEVELOPMENT SECTION ......................................................................................28
ATTACHMENTS ...........................................................................................................................28
EXPIRATION OF APPRAISALS........................................................................................................28
RE‐USE OF APPRAISALS................................................................................................................28

REPAIRS .......................................................................................................................................... 30

REPAIR POLICY OVERVIEW..........................................................................................................30
WHICH REPAIRS MUST BE COMPLETED ........................................................................................31
EXAMPLES OF REPAIRS THAT MAY BE WAIVED:............................................................................... 32
WHEN YOU CANNOT SET‐A‐SIDE FOR REPAIRS............................................................................. 32
NATURE OF REPAIRS.................................................................................................................... 32
TOTAL COST OF REPAIRS............................................................................................................. 33
CONTRACTOR QUALIFICATIONS................................................................................................... 34
CONTRACTOR ESTIMATE (BID) REQUIREMENTS............................................................................ 34
REPAIR SET ASIDE CALCULATION................................................................................................. 34
INSPECTION OF REPAIRS: ............................................................................................................ 35

TERMITE GUIDELINES .................................................................................................................. 36

TERMITE INFESTATION................................................................................................................ 36
TREATMENT PRIOR TO CLOSING .................................................................................................. 36
TREATMENT AFTER CLOSING ....................................................................................................... 37
TERMITE DAMAGE ...................................................................................................................... 37

FLOOD & HAZARD ........................................................................................................................ 38

FLOOD CERTIFICATION AND INSURANCE ...................................................................................... 38
FLOOD INSURANCE ..................................................................................................................... 38

Page 4 of 71

TITLE & LIENS ................................................................................................................................ 41

TITLE COMMITMENT................................................................................................................... 41
VESTING..................................................................................................................................... 41
ADDRESS.................................................................................................................................... 41

TAXES, LIENS AND PAYOFFS ....................................................................................................... 42

GIFT LETTERS................................................................................................................................. 43

SURVEYS.......................................................................................................................................... 44

SPECIAL CIRCUMSTANCES .......................................................................................................... 45

HECM STREAMLINED REFINANCE ............................................................................................... 45
OVERVIEW ................................................................................................................................. 45
OTHER SERVICERS ...................................................................................................................... 45
STEPS TO ORIGINATING AND PROCESSING A REFINANCE................................................................ 45
DISQUALIFIED BORROWERS ........................................................................................................46
DEFAULTS .................................................................................................................................. 47

DEATH CERTIFICATES.................................................................................................................. 47

SUBORDINATION ......................................................................................................................... 47

GENERAL GUIDELINES................................................................................................................. 48

MULTI‐FAMILY APPRAISALS ....................................................................................................... 49

WELL AND SEPTIC......................................................................................................................... 49

HEATING......................................................................................................................................... 50

OIL TANKS .................................................................................................................................50
SPACE HEATERS.......................................................................................................................... 51
WOOD STOVES & UNUSUAL HEAT SOURCES ................................................................................. 51

Page 5 of 71

FLAT ROOFS ................................................................................................................................... 51

AGRICULTURAL LAND AND EXCESS LAND .............................................................................. 51

“EXCESS LAND” IS LAND THAT WAS NOT INCLUDED IN THE VALUE OF THE PROPERTY
ON THE APPRAISAL. ..................................................................................................................... 51

DOUBLE LOTS AND EXCESS ACREAGE ........................................................................................... 51

PRIVATE ROADS AND SHARED DRIVEWAYS ........................................................................... 52

POWER OF ATTORNEY................................................................................................................. 52

POA DOCUMENT........................................................................................................................ 53
APPLICATION, COUNSELING & COMPETENCY................................................................................ 53
SIGNING..................................................................................................................................... 53
AT CLOSING ............................................................................................................................... 54

GUARDIAN OR CONSERVATOR................................................................................................... 54

GUARDIANSHIP DOCUMENT ........................................................................................................ 54
APPLICATION, COUNSELING & COMPETENCY................................................................................ 54
LDP AND GSA............................................................................................................................ 54
SIGNING DOCUMENTS................................................................................................................. 54

LIVING TRUSTS.............................................................................................................................. 55

GENERAL TRUST GUIDELINES ...................................................................................................... 55
REVOCABLE TRUSTS.................................................................................................................... 55
BENEFICIARIES ...........................................................................................................................56
OBTAIN A COPY OF THE TRUST ....................................................................................................56
TRUST APPROVAL .......................................................................................................................56
TRUST ITEMS SIGNED AT CLOSING ...............................................................................................56
TRUSTS WITH POAS OR CONSERVATORS ......................................................................................56

LEASEHOLD.................................................................................................................................... 57

Page 6 of 71

LIFE ESTATE.................................................................................................................................... 57

LOANS CANNOT CLOSE IN A LIFE ESTATE IN TEXAS. .............................................................. 57

NON‐BORROWING SPOUSES...................................................................................................... 57

LEGALLY SEPARATED SPOUSES .....................................................................................................59

PLANNED UNIT DEVELOPMENT – PUD .................................................................................... 59

MODULAR AND MANUFACTURED HOMES............................................................................... 59

MODULAR HOMES......................................................................................................................59
DEFINITION OF A MANUFACTURED HOME(MOBILE HOME).......................................................... 60
GUIDELINES FOR MANUFACTURED HOMES.................................................................................. 60
MANUFACTURED HOME APPRAISALS ........................................................................................... 61

CONDOMINIUMS AND CO‐OPS .................................................................................................. 61

DEFINITIONS.................................................................................................................................. 61

CO‐OPS ..................................................................................................................................... 61
GENERAL CONDO GUIDELINES .................................................................................................... 61
CONDOMINIUM APPRAISALS ....................................................................................................... 63
FOR MORE INFORMATION REGARDING SPOT CONDO APPROVALS, SEE REVERSE MORTGAGE ALERT
#2008‐04) .................................................................................................................................64
HUD APPROVED CONDOS ..........................................................................................................64
RIGHT OF FIRST REFUSAL PERMITTED FOR CONDOS .....................................................................65
RECREATIONAL LEASES FOR CONDOS ...........................................................................................65

GLOSSARY OF TERMS ................................................................................................................... 66

Page 7 of 71

HECM (FHA/HUD Product)

Plan Overview

Maximum Lending Limit: Maximum HUD loan limit depending on the geographic
area
Non‐recourse loan
Available to homeowners 62 and older
No income approval; minimal credit approval
No restrictions on use of loan proceeds (tax free)*Consult your tax advisor
Eligible home types include single family, 1‐4 unit, Condo, PUD, and
manufactured homes
No Home Purchase Product Available
Variable T‐Bill or Libor interest rate is adjusted monthly or annually
Federally Insured
2% MIP* plus monthly premium of ½% of outstanding loan balance
Funds are available as upfront cash payment, line of credit, tenure payment
(monthly income for as long as the borrower lives in the home), term payment
(monthly income for a set term), or a combination of the above
Available balance in the line of credit grows annually at mortgage interest rate
plus ½% (the ½% is equivalent to the monthly MIP)
Loan origination and closing costs may be financed in the loan
A monthly service fee is added to the loan balance and a Set‐Aside is taken at the
initiation of the loan
Social Security or Medicare eligibility should not be affected
Need‐based programs, such as Medicaid and SSI, may be affected. Borrowers
should consult a trusted advisor before proceeding
No minimum draw on Line of Credit
No minimum cash draw at closing
No Equity or Appreciation Sharing Features

Interest Rate Options and Calculations
Monthly ARM 1‐yr T Bill index or LIBOR index + margin. No monthly/annual cap,
Lifetime cap = 10 points above initial rate
Annual ARM 1‐yr T Bill index or LIBOR index + margin (3.10%) 2% annual cap
increase Lifetime cap = 5 points above initial rate
FIXED Rate‐LIBOR 5 year swap. No Principal Limit Lock available on Fixed. Rate
is locked up to 4 days prior to closing

Page 8 of 71

Equity Calculations
Based on the home value or maximum claim amount (whichever is less), expected
interest rate, and the age of the youngest borrower
HECM uses both an “initial rate” and “expected rate”. The expected rate (based on
10‐yr T bill or LIBOR + margin), is only used to calculate the equity available. The
initial rate (based on 1‐yr T bill or LIBOR+ margin) is the note rate (variable
interest charged on the outstanding loan balance)
120 Day Principal Limit Protection. The PLP protects the amount of funds the net
principal limit, not the interest rate. PLP expires 120 days after the FHA Case
Number is assigned.

Application Documents
Required application disclosures must be printed through LLS. Calculation
printouts are provided by the SLN software.( See submission checklist for a list of
required application forms)

Loan Officer Certification
The loan officer certifies that he or she had certain forms completed and signed,
and has given the borrowers certain forms to read.
This is not a complete checklist of all forms required at the application.

1009: Application

Like the 1003 application, but altered specifically for Reverse Mortgages. We no
longer accept the 1003;  Application form 1009 must be used.
At application, all spaces on the 1009 except the case number and legal description
must be completed.   Although vesting information may not be available, it is wise
to at least ask the borrowers who owns the home.  If any non borrowers own the
home, advise the borrowers that all parties on title must be eligible for and
participate in the reverse mortgage. (Life estates and trusts are eligible as listed in
the “Life Estate” heading and the “Living Trusts” heading)
Otherwise, fill in all information, even items that do not seem to apply, such as
monthly income. Although it is not necessary to verify some information such as
the borrowers’ monthly income, this information is necessary for HMDA reporting
purposes.

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Please include this information to avoid file delays.

The borrowers’ dates of birth and Social Security numbers must match the
information verified on the Customer ID Certification and must be consistent
throughout the file.
The “Real Estates Assets” line includes the home value and should not be zero.
Fill in the marital status for each borrower. If the borrower is married and the
spouse is not on the loan, refer to the “Non Borrower Spouse” heading on page 41.
On the bottom of the 2nd page, write the estimated amount of loan proceeds that
will be used for home improvement. It is not necessary to verify that the home
improvement takes place.
o Examples:
o “$0.00 Allocated for Home Improvement.”
o “$5,000 Allocated for Home Improvement.”
There is no correlation to this question and what underwriting conditions for
required repairs. This is for government monitoring purposes only.
The Loan Officer must sign and date the third page and fill in phone number and
address.
For broker loans the address should match the address of a branch of the broker
company that has been approved by World Alliance Financial.
The Loan Officer must complete the interviewer section contained in Section VIII
of the 1009 as part of the application interview. It is a critical component of the
government monitoring information. If the application was face‐to‐face, we will
not underwrite the file until the borrowers’ race, ethnicity, and gender are filled
in.
Face‐to‐face Interview
o The Loan Officer should ask for the borrower’s race, ethnicity, and gender
and fill that information in.
o If either of the borrowers declines to provide the information the Loan
Officer must fill that in based on visual observation or surname.
Telephone interview:
o The Loan Officer should ask for the borrower’s race, ethnicity, and gender
o If the borrower declines to provide the information, the Loan Officer will
select the “I do not wish to furnish this information” option.

Mail, Fax, or Internet:
o The Loan Officer should ask for the borrower’s race, ethnicity and gender
o If the borrower declines to provide any information, the Loan Officer will
select the “I do not wish to furnish this information” option.

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o If the borrower provides partial information, the Loan Officer should
indicate that the borrower provided partial information.

Alternate Contact
This must be used in addition to or instead of the space on the application.
We prefer two contacts, but only one is required.
We prefer a contact that does not live with the borrower.
We prefer that the contact be aware of the loan to assist with repairs or when the
loan comes due.
The contact can be a friend or a relative.
**If the information is provided on the 1009 the underwriter should not condition for the
alternative contact form. The 1009 must include all of the information listed above, or
underwriting will condition for the form

USA PATRIOT Act Customer Identification Certification
Use one form for each borrower. In other words, use two of these forms if there are
two borrowers.
Use an additional form for each Power of Attorney or Guardian/Conservator.
Additional requirements apply for these two circumstances. Refer to the POA
heading for more information about POAs, and the Guardian/Conservator heading
for more information about Guardians.
Non‐compliance with the Customer ID Policy carries heavy fines from the US
Government, and potentially cease and desist orders.

Borrower’s Certification and Authorization
Borrowers certify that they did not misrepresent or omit information on the
application.

Important Terms Disclosure/Application Truth‐in‐Lending
Contents of form vary by product; each product has its own form.
Explains the important terms of the loan, including a rate history.
May be state‐specific and is updated annually.
Include all pages in file.

Notice of Availability of Real Estate Appraisal
Notifies the borrowers of their right to see their appraisal.
For broker loans, the broker must fill in address in middle of form.

Housing Discrimination/Fair Lending Disclosure
This form explains that discrimination based on certain characteristics is illegal.
If you suspect discrimination, please call or email a World Alliance manager
immediately.

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List of Required Providers
A RESPA‐required addendum to the Good Faith Estimate.
Lists the names, addresses, and phone numbers of any third party providers of
service that were not chosen by the borrower.
Affiliated Business Disclosure
If a lender or broker will be using an affiliated business, such as a closing agent
owned by the lender or broker’s company, include that information on the List of
Required Providers.
You must also include a separate Affiliated Business Relationship disclosure
specifically explaining that affiliation. (This is a RESPA form)
The additional disclosure should also explain that you do not require that the
borrower use the affiliated business.

RESPA Servicing Transfer Disclosure
This form explains to the borrower the likelihood that servicing will be transferred
to someone other than the closing lender. (World Alliance services all of their
reverse mortgages).
Broker should use their own form if closing in their own name.

Lead Based Paint Certification
If the home was built prior to 1978, the borrowers should indicate whether any
small children live in the home. If so, any peeling paint must be repaired.

Calculation Disclosures
These forms do not have a World Alliance number.
These forms print from SLN and are specific to the product and options chosen by
the borrower.
Disclosures should consistently reflect the same product indicated on the 1009
application.
Disclosures should show the same date of birth verified on Customer ID
Certification
Comparison:
o Compares reverse mortgage programs. Must compare at least two products
Demo/Print‐Screen:
o This disclosure was created by FHA and is available for the HECM product only.
o This form is optional at the application, but it will be required at the closing.
Amortization Schedule:
o Shows how borrower’s loan balance is likely to grow after closing.
TALC:
o Also called Total Annual Loan Cost Rate.

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o Like an “annual percentage rate”, but takes into account fluctuating home value,
withdrawals of funds, term of loan, etc.
Good Faith Estimate
o Estimates the fees that will be listed on the HUD‐1 at closing.

Expected Principal Limit Disclosure

If the Broker/Loan Officer has used the software to quote the borrower and then later
prints an application package they will need to enter the actual signing date in RM App
and go to the rates page and hit the “Use Best Rates” button. This will show the proper
calculations in all screens, otherwise your Principal Limit lock disclosure rate will not
match all of the other application documents

o Found in S.T.O.R.M.
o Related to Principal Limit Protection.

Disclosure Regarding Excessive Fees [Paid to Estate Planning Service Firms]
Applies to HECM product only
Explains that the borrower may not pay a portion of the origination fee, or any fees
over and above the closing costs, to an estate planning service for their assistance
in obtaining a reverse mortgage. This is considered a referral fee, and it is illegal.
Payments on a reverse mortgage are limited to Sellers, lenders, and third parties
such as appraisers.

Tax and Insurance Disclosure

Applies to HECM and HomeKeeper products only
Borrower must indicate whether they intend to set aside for taxes or insurance.
They must indicate what they would like to set aside for (taxes, insurance, or
both) and for how long.
Because of the nature of the reverse mortgage, most borrowers do not set aside for
taxes and insurance. Escrowing for taxes and insurance decreases the net principal
limit. In other words, if the borrower escrows for taxes and insurance, we must set
aside money from the loan amount, and this decreases the cash available to the
borrower.
As they are deciding whether to set aside for taxes and insurance, remind your
borrowers that they are responsible for paying their taxes and insurance after the
closing.

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General Authorization, Joint Application, and Bankruptcy Statement
This is a three‐part form. Each part must be signed and dated by all borrowers, and
by the loan officer (“Lender”) where indicated. (or if LIBOR loan, will be in
included in the 5 page disclosure)
The Joint Application question should be answered “yes” if there are two borrowers
and “no” if there is one borrower.

Reverse Mortgage Advisor Disclosure
Advises borrower to consult with an attorney, relative, or other trusted friend
before continuing with a reverse mortgage.
Borrowers should list the person(s) they have consulted with, or indicate that they
have not consulted with a third party.

Other Notifications Disclosure
This form has two pages with several disclosures.
The top of page 1 should be completed with the borrowers’ names and addresses.
The annuities section at the top of page 1 must be signed and dated by both
borrowers.
The borrowers must check the first box at the top of page 2. (If the borrowers
acknowledge by checking box 1 that they have been informed, no further action is
needed regarding box 2.) If the borrowers do not check box 1, they must check the
2nd box and include the insurance company’s information.

Special Forms
If your borrower has a condominium or a multi‐family home, please have the appropriate
form signed (Spot Condo Form or Hotel and Transient Use Form). Also read the
“Condominiums” heading or the “Multi‐Family” heading before proceeding.
Additional guidelines for HECM product only

Private Well and Septic Notice
Make sure that the borrowers indicate whether they have a well or septic tank. If
they do, please read the “Well and Septic” heading.

Loan Payoff Request
This is an optional form for borrowers who have a loan to be paid off.

State‐Specific Forms

Brochure: Is a Reverse Mortgage Right for You?
This form is a brochure which does not have to be signed.

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Explains the basics of reverse mortgage, and potential drawbacks, including how
the mortgage is likely to affect the borrower’s government benefits. Become
familiar with the brochure called “Is a Reverse Mortgage Right for You?” It
explains how a reverse mortgage can affect the special circumstances that senior
citizens deal with (such as how reverse mortgages affect Medicaid).

Special State Restrictions
Texas Information

Proposition 7 on the ballot in November of 2005 changed reverse mortgage law and now
will allow lines of credit and funding on any day of the month. This is available for all
borrowers whose loans closed after March 17, 2006. (Borrowers whose loans closed prior
to that date must refinance their HECM loan if they want a line of credit. Because Texas
law only allows reverse mortgages to a “natural person”, loans cannot close in a
trust or a life estate. In Texas, a document preparation fee is not allowed. However, an
attorney review fee is allowed, because the final loan documents at closing must be
prepared by an attorney. The fee for attorney review will be paid to the attorney, not
World Alliance Financial.

World Alliance is only able to approve Closed Loan Sellers for business in NC as
brokering reverse mortgages in North Carolina is prohibited.

Origination Fee and MIP
$2000.00 or 2% of maximum claim amount* ‐ whichever is GREATER
2% MIP* plus monthly premium of ½% of outstanding loan balance
All legitimate third party fees may be financed into the loan balance

*Origination and Mortgage Insurance premiums are calculated using the
Maximum Claim Amount(MCA for HECM) – not amount borrowed

Counseling
HECM counseling must be completed prior to borrowers commitment to the loan
(cannot incur any costs on the borrower’s behalf).
Counselors must be FHA approved to offer HECM counseling.

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The original counseling certificate or a copy with both counselor and borrower(s)
signature is required for loan approval with original to be in file by closing;
counseling certificates are product specific and not transferable.
See Reverse Mortgage Alert #2008‐01 for more information

General Counseling Guidelines
For the HECM loans, we may not process the loan or order ANY documents that
cost money until counseling has been completed. This rule does not apply to the
EPA (Equity Plus Advantage) or Simple 60, except for special rules in California.
Borrower, spouse, POA, guardian, conservator on title to the property must
receive counseling and a counseling certificate as well as any non borrowing
spouses.
The original or certified copy of the counseling certificate (signed and dated by
the counselor and all potential borrowers and/or their representatives) must be
included with every loan submission. At NO time in the process may you or an
employee contact a counselor or counseling agency to:

o Refer a client;
o Discuss a client’s personal information, including the timing or scheduling
of the counseling;
o Request information regarding the topics covered in a specific counseling
session.

Counseling certificates are program specific; that is, there is one certificate for
HECM, one for Home Keeper, one for the EPA (Equity Plus Advantage) and one
for the Simple 60.

Face‐to‐face Interviews: For HECM loans, a face‐to‐face interview is no longer
required. (accept as listed below)
• Face‐to‐face counseling is required by law in Massachusetts and North
Carolina, even if the application was face‐to‐face.
• The Loan Officer attendance at closing will not substitute for the face‐to
face interview or the face‐to‐face counseling.
World Alliance Financial requires that a non‐borrowing spouse also attend
counseling. There are additional requirements for removing a spouse from title.
They can be found under the “Non‐Borrowing Spouse” heading.

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Counseling the Borrowers’ Representatives
Persons with power of attorney or guardianship must be counseled. See the “Power of
Attorney” or “Guardian/Conservator” heading for additional requirements.

Guidelines to Processing the Loan
We will not begin processing until AFTER Counseling has been completed! None of these
items may be ordered before counseling is complete:

Credit Report
Termite Report
Flood Certification
Appraisal
Case Number Assignment

Penalties for Non‐Compliance
We cannot collect any fees from the borrower at closing if we incurred them prior to
counseling.

Allowed Activities Prior to Counseling
Educate the borrower about reverse mortgages and discuss whether the potential
borrower is eligible.
Run an AVM or similar report to help determine the estimated value of the
property (cannot charge to the borrower)
Discuss fees and the potential implications of a reverse mortgage.
Take an application and provide the borrower with copies of the mortgage, note,
and loan agreement (HECM only)
Provide the borrower with the appropriate lists and counseling options.
Order a preliminary title report (except in California).
Ensure that potential borrowers have not incurred any financial obligation until
after receipt of the counseling certificate and the borrower reaffirms intention to
continue with the application.

Prohibited Activities for Counselors
Counselors may never provide information on the specific prices charged by any
individual lender.
Counselors are not permitted to promote, represent, recommend, or speak for any
specific lender.

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Counselors may not charge the borrowers a fee. In some situations, lenders may
pay for counseling. If you have any questions about this policy, please contact your
manager.
If you have concern about the service provided by a counselor, please contact your
manager.

Certificate Expiration Date
The initial application must be taken before the counseling certificate expires (it is
not necessary for a loan to close before the certificate expires).
If the certificate has expired, the borrower may not waive the additional
counseling session, even if they believe that a second session would not be useful.
If the certificate has multiple borrowers, as long as at least one borrower’s
signature on the certificate is within the 180‐day expiration period, we may
consider the counseling certificate as being valid for all borrowers on the loan.

Sources of Counseling
National Foundation of Credit Counselors:
The toll free telephone number is: 866‐698‐ 6322
Counselors are available from 7:30 am to 8:00 pm EST Monday through Thursday,
and on Fridays from 9:00 am to 6:00 pm EST.
Money Management International:
The toll free telephone number is: 877‐908‐ 2227
Counselors are available from 6:00 am to 8:00 pm EST Monday through Friday.
AARP:
The AARP counseling Web site is at: http://www.hecmresources.org.
The toll free telephone number is: 800‐209‐ 8085 (local 202‐434‐6082)
Borrowers facing foreclosure, or other similar emergencies, may call: 202‐434‐6051
Counselors are available from Monday to Friday from 7:00 am to 12:00 a
(midnight) EST.

Local Housing Counseling Agencies:
These agencies are not necessarily approved by AARP. They are approved by
HUD, and may also provide face‐to‐face or telephone counseling.
These counselors may only perform counseling for borrowers in their state.
The loan officer must give the borrower the name of five counselors from this list,
unless there are fewer than five counselors in your state.
The list of counselors can be located at:
http://www.hud.gov/offices/hsg/sfh/hecm/rmto pten.cfm
Fannie Mae Telephone Counselors no longer provide HECM counseling.
Direct Connect Reverse Mortgage Counseling Services:

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Direct Connect is helpful in areas where other sources of counseling have a
waiting time of more than a few days.  The Direct Connect management system
was created by OneSource Educational Development Corporation.  Direct Connect
can satisfy all counseling requirements for HECM, EPA (Equity Plus
Advantage)and Simple 60 loans, and will issue counseling certificates within 24‐72
hours.  The loan officer may provide the applicant with information regarding
Direct Connect.

USPS.com
In order to confirm the correct address for every loan submission, you must confirm the
borrower’s address on the United States Post Office website at www.usps.com. To avoid
confusion, notify your processors if the borrowers’ mailing address is different than their
street address.

FHA, LDP, & EPLS

FHA CONNECTION (or CHUMS)

Case Number Assignment
You must include a printout of the case number assignment (along with the CAIVRS
clearance on all borrowers) in every HECM loan submission. The Case Number is FHA’s
loan number. The case number assignment date is also used to determine the expiration
date of the Principal Limit Lock on the HECM ARMs.  The Principal Limit lock expires 120
from the Case Number Assignment date.

Case Number Expiration
Case Numbers do not expire. However, if the appraisal expires and we order a new
appraisal, we will also cancel the Case Number and order a new one.

CAIVRS Clearance

CAIVRS is an indication that the borrower is in default on a federal loan, such as a
student loan or an IRS tax lien. If a borrower is in default, we may not be able to close the
loan. It depends on what kind of loan the borrower defaulted on, and how long the
borrower has been in default. The CAIVRS report expires 90 days at the time of
underwriting, and 120 days at the time of closing.  See more info below.

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Case Authorization Interactive Voice Response System (CAIVRS) Clearance may show at
the bottom of the FHA Case Number printout, or may be checked separately on the FHA
Connection. The report should include a number that is preceded by the letter “A.” If an
“A” does not appear in front of the number, read the “If CAIVRS is Not Clear” heading
below. This site must be checked on all borrowers by Social Security number. You can
check the CAIVRS separately by following these instructions:
From the FHA Connection page, click Single Family FHA
From the Single Family FHA page, click Single Family Origination
From the Single Family Origination page, click Case Processing
From the Case Processing page, click CAIVRS Authorization CAIVRS expires 90
days at time of underwriting, 120 days at closing.

If CAIVRS is Not Clear


If CAIVRS is not clear (if claims or defaults are found on file) the processor will contact
the appropriate HUD Homeownership Center (HOC). The HOC will send a printout
showing information about the default, and the underwriter will use the printout to
determine the borrower’s eligibility. An explanation of that printout is available at:
http://www.hud.gov/offices/hsg/sfh/ref/sfhp2‐09.cfm. You may also contact the HOC
directly by going to http://www.hud.gov/offices/hsg/sfh/hoc/hsghocs.cfm.
If CAIVRS indicates the borrower is presently delinquent on an FHA loan, or has been
delinquent within the previous three years, the borrower is not eligible for a HECM loan.
Exceptions:
Assumption. If the borrowers can prove that they sold the property to an
individual who subsequently defaulted, the borrowers are eligible.
Divorce. A borrower may be eligible if a divorce decree or legal separation
agreement awarded the property and responsibility for payment to the former
spouse, and the spouse subsequently defaulted.
Bankruptcy. When the property was included in a bankruptcy that was caused by
circumstances beyond the borrower's control (such as the death of the principal
wage earner or serious long‐term uninsured illness), the borrower may be eligible
if the borrower meets certain requirements. For more information refer to HUD
Handbook 4155.1 paragraph 2E. The appropriate HOC can provide information
about when the three‐year waiting period will elapse or if the Social Security
number in CAIVRS is erroneous.

CAIVRS and Other Federal Debt


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If the borrower is delinquent on another type of federal debt, the same rules apply as for
federal debts found on the credit report. Refer to the “Credit Report” heading below

LDP and EPLS Lists
LDP and EPLS are lists of people and companies that may not participate in FHA
transactions. You must check the LDP and EPLS sites to ensure that your borrower is not
on those lists. If your borrower’s name appears on this list, he or she is not eligible for a
loan.

Credit

Ordering the Credit Report
An “in‐file” credit report is required on all loans.
The credit report must be run with three repositories and a public records check.

Bankruptcies
There are two kinds of bankruptcies that your borrower is likely to have: Chapter 7 or
Chapter 13.

Chapter 7 Bankruptcies
Chapter 7 bankruptcies must be dismissed or discharged.
If the credit report says that the bankruptcy was dismissed or discharged over a
year ago, no additional documents are required.
If it was dismissed or discharged less than a year ago, or if the credit report does
not show anything, a court order signed by the judge must be submitted as proof
of the discharge or dismissal.

Chapter 13 Bankruptcies
Chapter 13 bankruptcies leave 2 options:

The borrower may pay the bankruptcy off at the closing. Obtain a payoff letter
from the trustee.
The borrower may continue with the bankruptcy and the reverse mortgage.

o The borrower still has to pay off any liens against the property, and any
federal debt.

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o Obtain a written permission from the court signed by the judge, indicating
that the lender may continue with the reverse mortgage without paying off
the bankruptcy.
o When obtaining the permission, make sure that it specifies that the
mortgage will be an adjustable rate reverse mortgage.
o Ask the court not to specify a rate. Approval should either be at “current
market rates” or the current rate plus a stated percentage. (e.g. LIBOR plus
5%)
o Otherwise, if the rate allowed by the court is less than the current rate at
closing, we cannot close the loan.

World Alliance Financial must have the trustee payoff letter or the statement from the
judge prior to closing.

Foreclosure
We will close any loan in foreclosure, as long as it meets the other loan requirements. The
status of the foreclosure does not matter, as long as the foreclosure is not complete. We
will RUSH underwrite a file in foreclosure.  Processing should be notified prior to sending
the file.  “RUSH” should be written on the outside of the file. Include proof of foreclosure.
Also, add a comment indicating that the borrowers are in foreclosure, and include the
date of the foreclosure. Right of rescission can be waived in foreclosure ONLY if the home
will be sold during the rescission period. This can only be approved by compliance.

Tax Liens
All Federal tax liens and those secured by our subject property must be paid off at closing.
Your processor must obtain a payoff.

Federal Judgments and Debts

In the case of a federal judgment or debt, current FHA policy requires either that
the federal judgment or debt be paid‐in‐full or that a satisfactory repayment plan be
made with the federal agency.  The HECM borrower does not have to satisfy the total
federal judgment or debt outstanding to be eligible to receive a HECM loan if he or she
has entered into a satisfactory repayment plan with the federal agency owed.  In addition,
a prospective HECM borrower credit report must be reviewed to check for any claims,
defaults or debts to the federal government, and any existing debts against the real estate
that will serve as the collateral for the FHA‐insured HECM loan.  Any delinquent federal
debts or liens against the real estate, which will serve as collateral for the FHA‐insured
HECM loan, must not be in excess of the borrowers net principal limit unless the

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borrower has a separate source of funds from which to draw.  Liens against the real estate
must be removed or subordinated to the first and second HECM liens.

Student Loans
All delinquent student loans must be paid off.  Processing  must obtain a payoff and a
deferral agreement. If the borrower has a defaulted student loan, make sure that the
CAIVRS is clear. Refer to CAIVRS information on page 8

Outstanding Mortgages
All outstanding mortgages must be paid off on the property being used as
collateral for the reverse mortgage. If there is a mortgage on another property, you
must obtain proof or documentation, which can be a copy of the deed, mortgage
coupon book, letter from the mortgage company, or any acceptable
documentation.
If there are any liens less than a year old on the credit report, the title company
must confirm that this lien is not against the home. (This is because some counties
are behind in their recording.)

Judgments
Judgments must be paid off at closing if they are a lien against the property
securing the reverse mortgage.
The title company can verify liens and judgments on the property.
Any outstanding federal debt must be paid off or proof of a satisfactory repayment
plan must be provided.
Proof of the status of all judgments is required. The underwriter may require
evidence of satisfaction or payment arrangements.

State and Local Court Judgments and Judgment Liens

Several HECM lenders have inquired whether a prospective HECM borrower against
whom a judgment has been entered, and remains unsatisfied, must satisfy that judgment
prior to the HECM closing even though the judgment has not resulted in a judgment lien
against the borrower’s real property.  A judgment is a courts final determination of the
rights and obligations in a case. A money judgment is a judgment for a specific sum of
money and is subject to immediate execution, whereas a judgment lien is a lien imposed

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against the judgment debtor’s property.  A judgment lien gives the judgment creditor the
right to seize a debtor’s assets (i.e., real property) to secure a judgment, or sell the assets
to satisfy the judgment.  In accordance with FHA policy, a prospective HECM borrower is
not required to use HECM proceeds or satisfy an unpaid state or local court‐ordered
judgment prior to closing.  In cases where an unpaid state or local court‐ordered
judgment results in a judgment lien against the real estate, which will serve as the
collateral for the HECM loan and the judgment lien will not be subordinated to the
HECM first and second liens then it must be satisfied prior to closing.

A HECM mortgagee, however, has the option of requiring that a prospective HECM
borrower satisfy an unpaid state or local court‐ordered judgment even though the
judgment has not resulted in a judgment lien against the borrower’s real estate.  In the
event that a state or local court‐ordered judgment against a HECM borrower is not
satisfied prior to the HECM closing and subsequently that judgment results in a judgment
lien against the real estate, that judgment lien must be made subordinate to the HECM
first and second liens.

Identity
Credit reports may indicate conditions that need additional and immediate attention.
These conditions may include: name differences, erroneous social security numbers, etc.
The underwriter may ask for additional verification or a name affidavit. The underwriter
will compare the identity information on the credit report to the information gathered on
the Customer ID Cert.  If the credit report was ordered with the wrong social security
number, a new credit report must be ordered.   Per HUD guidelines, credit reports may
contain as few as the last four digits of the Social Security number. Sellers remain
responsible for validating the Social Security number using the Customer ID Certification
as usual.

Tru‐Alert
Credit reports also check for identity theft and other fraud. This is called the Tru‐Alert.
The underwriter should check the credit report for any possible fraud.

OFAC
Should be checked on credit report, if a positive hit is found, loan should be escalated to
the underwriting manager who will check the OFAC website and escalate to compliance if
an exact match is found.

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Appraisal
Must use an FHA, approved appraiser (subject to repairs). Home must meet minimum
FHA guidelines and any subsequent repair requirements.

Appraisal Report
This section summarizes the property requirements. A few special circumstances with
complicated requirements are listed in their own heading in the “Special Circumstances”
section. Please also read about manufactured homes, multi‐family homes, and
condominiums if applicable.

Primary Residence

Reverse mortgages must be secured by the borrower’s principal residence. A common
question raised in this regard is whether the borrower’s site for voting, automobile
registration and the like become the controlling factor in assessing the borrower’s
principal residence. The answer to that question is no. For purposes of the reverse
mortgage, the borrower’s principal residence is where he/she spends the majority of the
calendar year. In other words, if the borrower typically spends at least 183 days of the
calendar year at the proposed collateral property, that property would be considered the
borrower’s principal residence. The borrower may only have one principal residence at
any one time.

Subject Section

The Occupant should say “owner”. If the borrower is not the occupant, we cannot
close the loan.
If the Property Right Appraised says “Leasehold,” or if the appraiser shows ground
rent on the appraisal, please read the “Leasehold” heading.
If anything is checked under “Project Type” please read the “Planned Unit
Development” or “Condominium” sections of this guide.
The subject property should not be currently for sale. If it is we will require proof
that the property listing has been withdrawn

Neighborhood Section
Present land use should not show that the land use change is in progress to a
nonresidential use (such as commercial).

Site Section
Check the site area for excess land and if necessary read “Excess Land” heading.

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The zoning classifications must be noted and must allow for the number of units.
If there is zoning, zoning compliance must be “Legal”. If it is “Legal Non‐
Conforming” we will need a letter from the zoning board stating that the home can
be rebuilt if completely destroyed. If you can’t obtain that letter, we may be able to
close the loan if the borrower will sign a “Hold Harmless” agreement at the closing
saying that they understand that if the home is destroyed, home insurance
payments will be paid first to satisfy the lien. If zoning is illegal, the file may be
rejected. If there is no zoning, the file will be accepted as long as the home is in an
area used for residences (rather than a commercial area).
The highest and best use must be “Present Use”. For example, if the borrowers live
in a small house in the midst of a group of skyscrapers, that is not the highest and
best use of the property, and we will probably reject it.
If there is a well on the property, please read the “Well and Septic” heading.
The appraiser will look for site considerations such as high power lines. Please
read the “Repairs” section. Some site considerations, such as soil poisoning or
hazardous waste, must be corrected prior to closing.
If there is a nearby radio tower, high‐voltage power line, cell phone tower, etc. you
may need an engineer’s certification that the home is not within falling distance.

Improvements Section
Homes may have one to four units for the HECM loan. The home must be single‐
family. If the home has more than 1½ units, the appraiser must use the Small
Residential Income Form (1025).
• A half‐unit is a unit that is subordinate in size and design to the main unit,
such as a basement apartment in a residential home. 1½ units are allowed,
and the appraiser should use the single‐family form (1004). 2½, 3½, and 4½
units are not allowed.
If the foundation shows evidence of infestation, dampness, or settlement, the
appraiser should condition for repairs.
Heating:
• Check for oil heaters, space heaters, wood stoves, and unusual sources of
heat, and read the Heating heading.
• All homes must have heat, except in counties in tropical areas (southern
Florida and Hawaii). See HUD Keywords Index under “Heating” for
counties.
Check the windows in Exterior Description.
• Barred bedroom windows and only one window per room must have an
emergency release mechanism.
Appraiser will list repairs in Condition of Property, and repeat the repair
information in the Comments on page 3.

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If the property is an unusual home (such as a log home or an extremely modern
home) the appraiser should find additional comps.  The appraiser will also
complete the Cost Approach Section. (See more information in the Unique
property section )

Sales Comparison Approach Section
In this section, the appraiser compares the borrower’s home to other properties in
the area. The appraiser must provide at least three comparables less than one year,
which can be difficult in areas with few recent sales.
Home must be 100% complete at time of inspection and a Certificate of
Occupancy is required if the home is new.
At the bottom, the appraiser will indicate how much the home is worth using this
approach.   This is not the appraised home value, because there are other possible
approaches.

Reconciliation Section
At the top of this section, the appraiser should show the results of the various valuation
approaches.

Additional Comments Section
HUD added this section so that the appraiser can comment on the appraisal
without attaching an addendum. It may include long legal descriptions and other
explanations that did not fit elsewhere
Repairs and inspection requirements will be summarized here. Our repair policy is
listed in a separate heading in this Underwriting Guide

Cost Approach Section
The Cost Approach shows the cost to build the home as‐is, new, and then takes
depreciation into account.
The estimated remaining life of the property must be shown. The remaining life
must be at least 30 years or longer. (This is only likely to be a problem with
manufactured homes)
If the Estimated Site Value exceeds 35% if the home value, appraiser must
comment on whether that is typical for the area.
To assist in calculating the hazard insurance coverage, the appraiser must
complete the entire Cost Approach section or provide the site value or estimated
cost new.

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Planned Unit Development Section
If the borrower has a home in a PUD, the appraiser must fill this section in.
Check to make sure that the borrower is current on their dues to the PUD (title
search should show this).
Check to see if roads are public. If not, read Private Roads and Shared Driveways
heading.

Attachments
Home may not be listed as for sale, under contract, or active listing; check the
photographs for signs in yard.  If appraisal indicates home is currently listed for sale,
the underwriter should condition for the home to be removed as an active listing.
No condition is necessary if the appraiser indicates the home was recently listed
for sale.

Expiration of Appraisals
Appraisals expire after six months.

Re‐use of appraisals
Appraisals that were used to close a previous FHA loan cannot be re‐used, even if they are
less than six months old. Each new FHA loan requires a new appraisal.

Declining Markets
Appraisal Practices in Declining Markets

World Alliance Financial will order an AVM for any property indicated by the
appraiser to be in a declining market.  The underwriter will use this information to
help support the appraisal and to help determine if the appraiser provided
adequate information to support the decline as well as the value.

Historically, FHA has provided a counter‐cyclical force in helping to stabilize declining
housing markets and will continue to do so.  In fact, much of FHAs business activity this
year has been in those states (e.g., Ohio, Michigan, Indiana) that have suffered sustained
depreciation of home prices due to job losses and increased foreclosures.  Nevertheless,
recent property value declines in certain markets suggest the need to reiterate our
guidance to ensure that appraisers are providing accurate property valuations.  A

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declining market could be as small as a neighborhood or as large as an entire state, and
no standard definition exist other than home prices are falling.

Appraiser Responsibilities

The purpose of the appraisal is to provide the lender/client with an accurate, and
adequately supported, opinion of market value.  It is the appraiser’s responsibility to
determine whether a property being appraised is located in a declining market.

The neighborhood section of each property specific appraisal form contains a housing
trends section where the appraiser marks a box indicating property values are increasing,
stable or declining.‐ Whichever box is selected, the appraiser is certifying that he/she has
performed an objective analysis of quantifiable data supporting the observations made.

If a property is located in a declining market, the appraiser must provide an explanation
in the Market Conditions section of the appraisal report that includes relevant
information in support of the conclusions relating to trends in property values,
demand/supply and marketing time. The appraiser must also provide a description of the
prevalence and impact of sales and financing concessions and/or down payment
assistance in the subject’s market area. Other areas of discussion may include days on
market, list‐to‐sale price ratios, and/or financing availability.


Lender Responsibilities

The mortgagee’s responsibility is to properly review the appraisal and determine that the
appraised value used to support the mortgage is accurate and adequately supported.

We are held responsible by HUD for the appraisers we select, therefore we have a zero
tolerance for fraudulent appraisal reports.  We accept responsibility for the integrity,
accuracy, and thoroughness of the appraisal submitted to FHA for mortgage insurance
purposes.

Valuation by Underwriter

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When an appraisal in a declining market is reviewed, in addition to all standard
information an Appraiser provides, the Underwriter looks for specific information as
follows:
The appraiser’s comments regarding the decline in values in the area and whether
or not the appraiser took the decline into account when assigning their value to
the property;
Comparable properties are nearby and are not outdated;
The date of the appraisal relative to the value assigned (older appraisals may
require updates from the Appraiser, including better comps);
Recent MLS (Mortgage Listing Service) listings to support the value assigned;
A large concentration of homes for sale in the area (this is typically a good
indication of declining values).
It is important to note that World Alliance Financial Underwriters are responsible
for the final accepted appraised value used for our lending purposes.

After careful review of all facts, an Underwriter may determine that a decrease in the
appraised value is warranted. World Alliance Financial may also submit the appraisal to
upper management as appropriate. We are confident that implementing this strategy will
result in more solid valuations that are completely documented and supported with facts.
NOTE: In most cases, the Appraiser should have already adjusted the value in accordance
with market conditions, and commented as such, in which case no further adjustment
would be warranted.

Ineligible Properties

Hawaiian Homelands

Repairs

Repair Policy Overview
Problems with the property are identified by an appraiser, inspector, or termite company.
The underwriter decides which of these problems must be repaired.
Termite reports are handled separately from other repairs. Read the “Termite” heading in
this section. Required repairs are usually only those necessary to protect the health and
safety of the occupants, protect the security of the property, or strengthen the soundness
of the structure. Read the heading “Which Repairs Must Be Completed” We must address
all required repairs before the loan is cleared to close, either by planning a set‐ a‐ side, or
by showing that repairs are complete and inspected. Read the heading “When You Can
Escrow for Repairs.” Encourage borrowers to complete repairs prior to closing when
possible. An inspection by the appraiser will verify that the repairs are complete.
To obtain a set‐ a ‐side for repairs:

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We need one contractor’s bid, selected and approved by the borrower, prior to closing.

The loan officer is responsible for helping the borrower choose a contractor.  The
loan officer will provide a list of contractors to choose from but does not
recommend a particular contractor.
Appraiser’s estimates are accepted in some circumstances. Read the“Contractor
Qualifications” heading, and the “Contractor Estimate (Bid) Requirements”
heading. This bid will be used to calculate the set‐aside amount. Read the “Repair
Set Aside” heading. The servicing department will administer the repairs and make
sure that they are completed inspected after closing. Read the “Inspection of
Repairs” heading. We collect an administration fee on the HUD‐1 at closing (this
may be added to the loan balance). The administration fee is the greater of $50 or
1.5% of the base repair amount. Typically the Servicing Department will disburse
funds by one of the following methods:

Draw Schedule (larger repairs)
Initial draw for 1/3 of estimate
Disburse funds only at completion of work (smaller repairs)

The disbursement method is at the discretion of the servicing department.
After the closing, the servicing department administers the repairs and disburses
funds to the contractor as appropriate. The borrower orders the repairs from the
contractor. The repairs must be completed within 6 months after the closing.

Which Repairs Must Be Completed
The underwriter decides which repairs will be required, on a case‐by‐case basis.
Examples of repairs that will be required:
Inadequate exits from bedrooms to exterior of home
Leaking or worn out roofs (if 3 or more layers of shingles on leaking or worn out
roof, all existing shingles must be removed before reroofing)
Evidence of structural problems (such as foundation damage caused by excessive
settlement)
Defective paint surfaces in homes constructed pre‐1978.
o If the damage to the paint is minor, repairs are not required unless there is
    a child under the age of seven years residing in the property.
o To determine whether there is a child living in the home, we will use Lead
Based Paint Certification.
Defective exterior paint surfaces in any home, regardless of the age of the home,
where the finish is otherwise unprotected.

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Examples of repairs that may be waived:

Missing handrails
Cracked or damaged exit doors that are otherwise operable
Cracked window glass
Defective paint surfaces in homes constructed post 1978
Minor plumbing leaks (such as leaky faucets)
Defective floor finish or covering (worn through the finish, badly soiled carpeting)
Evidence of previous (non‐active) termite damage where there is no evidence of
un‐repaired structural damage
Rotten or worn out counter tops
Damaged plaster, sheetrock or other wall and ceiling materials in homes
constructed post 1978
Poor workmanship
Trip hazards (cracked or partially heaving sidewalks, poorly installed carpeting)
Crawl space filled with debris and trash
Lack of an all weather driveway surface

When You Cannot Set‐A‐Side for Repairs
In some cases, we will not allow you to do a set‐a‐side for repairs. This is usually due to
the urgent nature of the repairs, or the high cost of the repairs.

Nature of Repairs
The underwriter may decide that you cannot do a set‐a‐side for a particular
problem because of the nature of the repair. These are usually health‐ and safety‐
related repairs that are correcting extremely hazardous problems.
Examples include:
Broken or inoperable exterior windows
Inadequate exits in case of fire
Roof leaks
House must be jacked up to repair foundation
Well and septic don’t meet FHA requirements
Sparking, smoking, unconnected, frayed electrical wiring
Evidence of sink holes or slush pits
Easements for “high‐pressure” gas or oil lines
Evidence of soil contamination
Property cannot be legally accessed by road or right‐of‐way
Nearby hazards such as:

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Oil or gas drilling (proposed, in progress, or abandoned)
o
Slush pits
o
Traffic, fumes, or noise to a hazardous degree
o
High‐voltage or radio towers in falling distance
o
Landfills or other hazardous material
o

Total Cost of Repairs
Sometimes you cannot do a set‐a‐side because the repairs are too expensive. This page
explains how expensive the repair can be if you plan to do repairs after closing.
Remember, even if the bid is not too expensive, you might not be able to do a set‐a‐side
because of the nature of the repair.

Definitions:

To understand this section, you need to know that the maximum claim amount is
the lesser of the home value or the HUD County Lending Limit.
Limits on repair cost when establishing a set‐a‐side:
If the bid is less than 15% of the maximum claim amount, then you may escrow for
repairs.
o Example: Max claim is $100,000, and the repair bid is $13,000. That’s 13%
of $100,000, and you may establish a set‐a‐side for repairs.
If the bid is more than 15% of the maximum claim amount, then you must
complete some repairs prior to closing. (Complete at least enough repairs to
reduce the bid to less than 15% of the maximum claim amount. Then you may
establish a set‐a‐side for the rest).
o Example: Max claim is $100,000, and the repair bid is $17,000 (17% of
$100,000). You get $2 ,000 in repairs done and inspected. This brings the bid
down to $15,000 (15%) and you may establish a set‐a‐side for the remaining
repairs.
HECM loans only: If required repairs are estimated to cost more than 30% of the
Maximum claim amount,(as evidenced by the appraiser or a contractor’s bid) the
underwriter should reject the property. A property should not be rejected by an
appraiser.

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Contractor Qualifications
All repairs must be performed by an engineer, licensed contractor, or qualified
professional.
We will accept an appraiser’s estimate for most repairs. Simply including the
estimate in the file is not enough. You must tell us specifically that you plan to use
an appraiser’s estimate. Otherwise, we will condition you for a bid.
A contractor’s bid is required for structural and foundation repair issues. Soil
pollution issues require an EPA inspector.
If you assist a borrower in selecting a contractor, give the borrower a minimum of
three (3) contractor names.
Contractors must be licensed in the states in which they operate (if the state
requires licensing). If the State does not require a license, we must have a copy of
the contractors insurance and E & O. Electricians and plumbers must always be
licensed. This website lists state requirements: http://www.contractors‐
license.org/index.html
All contractors should be qualified to perform the type of work being contracted
for, such as electrical, plumbing, foundation, etc.

Contractor Estimate (Bid) Requirements
Send only one bid for each repair. We will not choose between two bids. When
assisting the borrowers with obtaining a bid, give them a list of at least 3
contractors. Do not recommend a particular contractor.
Bids must be legible and must include:
Contractor’s telephone number
Clearly stated required repair items (itemized)
Total cost for job
If the bid is for structural damage, the bid must say whether or not the house will
need to be jacked up or supported to do the work. If it must be jacked up or
supported, the bid must say whether or not it is safe for the borrower to remain in
the house during the repairs. When a structure requires jacking or supporting, the
repairs must be completed prior to closing. The underwriter must determine if the
structural, foundation, or soil pollution risk is acceptable to approve the loan.

Repair Set Aside Calculation
Prior to closing, the borrower must select the contractor who will be performing
the repair work.
We calculate the repair set‐a‐side based on the bid selected. This should be the
same contractor who will perform the work.
Repair set‐aside calculations range from 150% of the bid. There is a $2000
minimum set‐aside, although the bid may be lower than $2000. More details
follow.

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When we calculate the repair set‐aside, we include a compliance inspection fee of
$100 for each inspection that we expect we will need.
We require repairs to be completed within six (6) months of closing
If the repairs are completed without using all the funds in the set‐aside, we will
transfer the remaining funds to a line of credit and tell the borrower how much we
transferred.
If the cost of the repairs exceeds the amount initially set aside for repairs, the
borrower must still have the required repairs completed. He or she may draw
against a line of credit to cover the excess cost. This procedure might require a
recalculation of the borrower’s payment plan.
Repair set‐aside requirements are calculated using the following formulas:
Bid Amount Formula Minimum Balance
Contractor’s bid multiplied by 1 1/2 times (150%) plus $100
OR
Appraiser’s estimate multiplied by 3 times (300%) plus $100 up to $1500, anything
over $1500 must have a contractors bid

Inspection of Repairs:
If your borrower is completing repairs before closing, a qualified individual must inspect
the repairs before you can clear the loan for closing.  If the repairs are completed after
closing, then the property must be inspected before we will disburse all of the funds to
pay for completed repairs. If the repair was identified by the appraiser, then in most cases
that same appraiser should be able to inspect it. Other repairs, such as those identified by
inspectors or termite companies, may require a HUD inspector, a professionally licensed,
bonded, registered engineer, licensed home inspector or appropriately registered/licensed
tradesperson.  In some cases a statement from the termite company or other licensed
professional certifying completion of the work may be accepted, but only when a
statement from the borrower is also received stating that the repairs have been
satisfactorily completed. Only in instances of minor repairs can the DE Underwriter waive
the inspection by an appraiser or other professional and accept a mortgagee’s certification
of completion of such repairs. These minor repairs must involve:

No technical skills
No structural skills
No knowledge

In these cases we would require a picture and a mortgagee certification using HUD‐92051.
The homeowner cannot perform the inspection.
The following people should use the Compliance Inspection Report, HUD‐92051:

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REVERSE MORTGAGE - HECM LOAN - Guidelines And Procedures

REVERSE MORTGAGE - HECM LOAN - Guidelines And Procedures

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