Complete Guide to the Reverse Mortgage Appraisal Process
By: Abigail Baart
November 30, 2023 • 7 minute read
A reverse mortgage is a financial tool that allows older homeowners a way to tap into the equity in their home without having to sell the home.
One vital step in the process of obtaining a reverse mortgage is to determine the value of the home, which is done with a reverse mortgage appraisal.
In this article, we will cover everything you need to know about the reverse mortgage appraisal process including all of the steps involved, what it costs, and what you can do if you don’t agree with the appraiser’s findings.
What is a Reverse Mortgage?
A home equity conversion mortgage (HECM) is commonly known as reverse mortgage. Reverse mortgages are federally backed loans available to homeowners who are 62 years of age or older to borrow against the equity in their home without taking on monthly mortgage payments.
A reverse mortgage loan will pay off the current forward mortgage if there is one, and for any remaining equity, borrowers will have the choice of receiving their funds as a lump sum payment, monthly payments, and/or a line of credit to draw from as needed.
A reverse mortgage is only available for homes that are the primary residence of the homeowners, the homeowners must also have equity built up in the home, and the home must be in good, maintained condition.
The homeowners still have to pay the property taxes, homeowners’ insurance, and maintain the home.
The amount of money that homeowners are able to receive from a reverse mortgage depends on the age of the youngest borrower, the interest rates, the FHA lending limit (as of 2024 it is $1,149,825), and the market value of the home.
This is where the appraisal comes into play because it helps determine the total loan amount.
Does a Reverse Mortgage Require an Appraisal?
Reverse mortgages are backed by the Federal Housing Administration (FHA) and regulated by the U.S. Department of Housing and Urban Development (HUD). One of the requirements for obtaining a reverse mortgage is to obtain an appraisal of the property. In fact, in some cases, two appraisals may be required.
Because reverse mortgages are insured by the federal government, the appraisal must be performed by an appraiser that is approved by the FHA.
The appraisal is required for two reasons. First, the appraisal will determine the market value of the home to assist the lender in determining how much the homeowners are able to borrow. Second, the appraisal will determine the condition of the home.
In order to take out a reverse mortgage on a property, one of the requirements is that the home is in good, maintained condition.
If an appraisal determines that there are issues with the property, that does not mean that a homeowner can’t get a reverse mortgage, but those issues or repairs will need to be addressed before moving forward.
In 2018, HUD announced that the FHA would require a second appraisal in some circumstances, primarily if the FHA believed that the final valuation of the property in the first appraisal was inflated.
If a second appraisal is required, the appraisal with the lowest valuation is the one that will be used.
One of the reasons why the accuracy of the appraisal is so important is because of the non-recourse feature of reverse mortgages. The non-recourse nature of reverse mortgages means that both borrowers and their heirs will never owe more than what the home is worth when it comes time to pay back the loan. If more is owed, then the FHA will pay the difference out of the Mutual Mortgage Insurance Fund (MMIF)
HUD explained that the option for a second appraisal helps “mitigate risk” to both the MMIF and the borrowers.
What is the Reverse Mortgage Appraisal Process?
The process for a reverse mortgage appraisal is the same as what is required for a forward mortgage. These are the general steps that you can expect:
- Order the Appraisal. The appraisal will be ordered by the lender from an appraisal management company (AMC). The AMC is the middleman between the homeowners/lender and the appraiser. The appraisal fee will be paid to the AMC, and then the AMC will pay the appraiser. The purpose is to ensure the integrity of the process. Toward that end, there is never supposed to be any interaction between the appraiser and either the homeowners or the lender.
- Home Inspection. The first step includes an inspection of the home, which will include inspecting both the interior and the exterior of the property. This may include pictures of the property and measurements.
- Assess the Area. The appraiser will also look into the neighborhood and surrounding area as well as research similar homes that have recently sold.
- Write up the appraisal. Last, the appraiser will put together the appraisal, which will include the value of the property as well as any notes about recommended repairs that will be needed to pass HUD’s requirements.
- FHA Approval. The appraisal is reviewed and approved by the FHA. If FHA doesn’t think the appraisal is accurate, it will order a second appraisal.
How to Prepare for an Appraisal
In advance of an appraisal, there are a few things that homeowners can do to prepare for the appraisal.
First, it is always recommended that you do your homework. Check websites that provide estimated market value information such as Zillow or Redfin. You can typically see what the estimated property value is as well as look at what homes have recently sold for in the area. This will help you to know what to expect in terms of valuation.
While the only valuation that will matter in the end is the one from the official independent appraisal, this will also help you know if the appraisal seems accurate, undervalued, or overvalued. If you believe that the valuation is off, you may want to order a second appraisal.
Second, if you know your home is in need of some obvious repairs, you may want to take care of these in advance of the appraisal. Some recommendations include making sure you have working smoke detectors in all rooms in the house, making sure the attic is accessible, making sure the stove and toilets are all working properly, and making sure that there are two ways in and out of each room, to name a few.
Doing this advanced work can help speed up the process or at least prevent any issues that may slow it down.
Reverse Mortgage Appraisal Frequently Asked Questions
How Much Does a Reverse Mortgage Appraisal Cost?
There are two costs involved in a reverse mortgage appraisal. The first cost is the fee for the AMC. Second, is the fee for the appraiser. While the exact amount you will pay for an appraisal can vary, for most reverse mortgages the combined fee comes out to about $625.
An appraisal can cost more if the property is considered complex.
Can I Choose the Appraiser?
Neither you nor your lender are allowed to choose the appraiser. The reason for this rule is to help protect the integrity of the appraisal process. This is also the reason why appraisals are ordered through an Appraisal Management Company (AMC).
The AMC takes the payment and assigns the appraisal to an appraiser.
How Long is a Reverse Mortgage Appraisal Good for?
A reverse mortgage appraisal is valid for 180 days from the completion date.
Until 2022, appraisals were only good for 120 days with the option of a 30-day extension. HUD extended the validity period in July 2022 to 180 days and removed the extension option. This move simplified the process and reduced both administrative and financial burdens.
How Long After the Appraisal Will a Reverse Mortgage be Finalized?
While the exact time to complete a reverse mortgage may vary depending on your lender and other factors, it can take up to 45 days to complete a reverse mortgage loan from start to finish. Once the appraisal is obtained, it may still take another 15 to 30 days. The reverse mortgage loan officer you work with will typically be able to give you a more accurate timeline of what to expect from that specific lender.
What Happens if I Disagree with the Reverse Mortgage Appraisal?
An appraisal can be challenged by the homeowners if they believe it is inaccurate. This is done by filing a request with the appraiser along with reasons why they believe the appraisal should be changed.
A reverse mortgage appraisal is an important step in obtaining a reverse mortgage. It determines the value of the home and helps determine the loan amount. The appraisal is required by the FHA and must be performed by an approved appraiser.
If there are issues with the property, they may need to be addressed before moving forward. Homeowners can prepare for the appraisal by doing their homework on the market value of their property and taking care of any obvious repairs in advance.
This information is intended to be general and educational in nature and should not be construed as financial advice. Consult your financial advisor before implementing financial strategies for your retirement.