A Home Equity Conversion Mortgage (HECM) repair set-aside is a portion of your reverse mortgage loan proceeds that the lender holds back at closing to pay for required home repairs. These repairs are completed after you have finalized the loan, using the loan’s own funds. This tool exists to solve a fundamental conflict in the federal HECM program.
The U.S. Department of Housing and Urban Development (HUD) requires, through its Minimum Property Standards (MPS), that any home securing a federally-insured HECM be safe, sound, and secure. This rule creates a direct problem for the very people the program is meant to help: seniors who are often “house-rich but cash-poor” and may not have the savings to fix a leaky roof or peeling paint before getting the loan. The repair set-aside is HUD’s solution, but it is governed by strict, unforgiving rules that can lead to loan default and foreclosure if not followed perfectly.
The need for this solution is widespread. Seniors aged 62 and older hold over $10 trillion in home equity, yet many live on fixed incomes, making it difficult to afford major repairs. The repair set-aside bridges this gap, but it turns the borrower into a project manager with legally binding responsibilities.
Here is what you will learn to navigate this complex process:
- ✅ Identify which repairs you must pay for out-of-pocket before closing versus those the loan can fund afterward, saving you from wasting limited cash.
- 💰 Master the critical “15% Rule” and the “150% Calculation” to understand exactly how much of your home’s equity will be locked away for repairs.
- ⏳ Learn to manage the strict 6-to-12-month completion deadline and communicate with your servicer to avoid the catastrophic consequence of a loan default.
- 🤝 Understand the correct way to hire, manage, and pay contractors—including the crucial lien waiver—to prevent legal disputes that could jeopardize your home.
- 🏦 Discover what happens to leftover repair funds and why your choice between a fixed-rate and an adjustable-rate HECM has a major impact on whether you get that money back as cash.
The Core Conflict: Why Your Home’s Condition Can Stop Your Loan Cold
The FHA’s Insurance Bet and Your Home’s Role as Collateral
The HECM is the only reverse mortgage program insured by the Federal Housing Administration (FHA), a part of HUD. This insurance is the program’s backbone. It guarantees that you or your heirs will never owe more than the home is worth when the loan is repaid, even if the loan balance has grown larger than the home’s value. This is called a “non-recourse” feature.
Because of this guarantee, the FHA is essentially betting on your home’s future value. Your house is the only collateral for the loan. If it’s sold for less than the loan balance, the FHA’s Mutual Mortgage Insurance Fund (MMIF) pays the lender the difference.
To protect this fund, HUD established its Minimum Property Standards (MPS). These are not suggestions; they are non-negotiable requirements that a property must be safe, sound, and secure to qualify for FHA insurance. A home with a failing roof, structural damage, or safety hazards represents a bad bet for the FHA from day one.
The repair set-aside was created to solve this standoff. It allows the loan to close on a home with minor-to-moderate issues by earmarking a portion of the loan proceeds specifically to fix them. This ensures the property is brought up to standard, protecting the FHA’s investment while still giving you access to the loan.
Repair Set-Aside vs. LESA: Two Different Buckets of Money
It is critical not to confuse a repair set-aside with a Life Expectancy Set-Aside (LESA). Though both “set aside” funds from your loan, they serve entirely different purposes and are governed by different rules. Think of them as two separate, locked boxes.
| Repair Set-Aside | Life Expectancy Set-Aside (LESA) |
| Purpose: To pay for physical repairs needed to bring the property up to FHA’s Minimum Property Standards. | Purpose: To pay for future property charges, like property taxes and homeowners insurance premiums. |
| Trigger: An FHA appraisal identifies physical deficiencies with the home. | Trigger: A mandatory financial assessment determines the borrower may struggle to pay future taxes and insurance. |
| Who It Protects: Primarily protects the FHA and lender by ensuring the collateral (the home) is in good condition. | Who It Protects: Primarily protects the borrower from defaulting on property charge obligations, which would lead to foreclosure. |
| Calculation: Based on 150% of the estimated cost of repairs. | Calculation: Based on the borrower’s life expectancy and the projected future costs of taxes and insurance. |
Understanding this distinction is vital. A LESA addresses your ability to pay future bills, while a repair set-aside addresses the physical state of your house right now. You could have one, both, or neither on your HECM loan.
The Appraisal: Where Your Home’s Fate is Decided
The entire repair process begins with the FHA appraisal. An FHA-approved appraiser will visit your home with two goals: determine its market value and inspect it for compliance with HUD’s Minimum Property Standards. This is not a typical home inspection meant to find every little flaw for your benefit; it is a risk assessment for the lender and the FHA.
The appraiser’s findings are sent to the lender’s underwriter, who holds the ultimate power. The underwriter reviews the report and makes the final decision on which repairs are mandatory, whether they must be done before closing, or if they can be deferred to a post-closing repair set-aside. This is where your repair journey is officially mapped out.
The Great Divide: Repairs You Must Pay For vs. Repairs the Loan Can Cover
The underwriter will sort the appraiser’s list of required repairs into two distinct categories. This decision determines who pays for the work and when it must be done. There is no negotiation on this point.
1. Mandatory Pre-Closing Repairs (Your Money, Your Problem)
Any issue that threatens the health and safety of the occupants or the structural soundness of the property must be fixed before the loan can close. Because you cannot access HECM funds before closing, you must pay for these repairs out of your own pocket. This could mean using savings, a credit card, or getting help from family.
2. Post-Closing Repairs (Set-Aside Eligible)
Repairs that are necessary to meet FHA standards but are not immediate threats can be paid for using a repair set-aside after the loan closes. These are often cosmetic or minor functional issues. This is the category of repairs that the set-aside mechanism is designed to handle.
| Pre-Closing Repairs (Must be fixed with your own money) | Post-Closing Repairs (Eligible for a Repair Set-Aside) |
| Major roof problems, like an active leak | Peeling exterior paint |
| Foundation or structural integrity problems | Broken windows (if not a security risk) |
| Evidence of mold | Rotten or damaged exterior wood siding |
| Major electrical or plumbing hazards | Minor, non-hazardous plumbing or electrical issues |
| Missing handrails on exterior stairs | Cracked or broken concrete on walkways |
| An empty, unfenced swimming pool (drowning hazard) | Exposed wood that needs to be painted |
| Termite damage | Cracked window glass (if not a safety hazard) |
The underwriter’s discretion is a major factor here. What one underwriter considers a “major” roof problem, another might classify as eligible for a set-aside if it’s not actively leaking. This subjectivity makes it crucial to work with an experienced HECM specialist who can help you anticipate what an underwriter might flag.
The Numbers Game: How the Set-Aside Shrinks Your Available Equity
Once the underwriter finalizes the list of eligible post-closing repairs, the lender calculates the exact amount of money to be held back in the set-aside. This calculation is governed by two strict HUD rules that significantly impact the amount of loan proceeds you can access.
The 15% Threshold: The First Hard Limit
HUD dictates that the total estimated cost of repairs for a set-aside cannot exceed 15% of your home’s Maximum Claim Amount (MCA). The MCA is the lesser of your home’s appraised value or the national HECM loan limit, which is $1,209,750 for 2025.
If the contractor bids or appraiser’s “cost-to-cure” estimate is more than this 15% ceiling, a full set-aside is not allowed. To move forward, you must complete and pay for some of the repairs yourself before closing to bring the remaining cost down to or below the 15% limit. This rule prevents the HECM from being used as a full-scale renovation loan.
The 150% Calculation: The Lender’s Safety Buffer
To ensure there is enough money to complete the job, even with unexpected problems, the lender is required to hold back 1.5 times (150%) of the total estimated repair cost. For example, if repairs are estimated at $10,000, the lender will set aside $15,000 from your loan proceeds.
This extra 50% is not a contingency fund for you to use as you please. It is a lender-controlled buffer to cover potential cost overruns. You do not have access to this money during the project; it is there to protect the lender’s interest in their collateral—your home.
The Hidden Catch: What Happens to Leftover Money?
After all repairs are finished, inspected, and paid for, any surplus funds from the 150% calculation are released. Where this money goes depends entirely on the type of HECM you chose, a detail that many borrowers overlook with significant financial consequences.
| Loan Type | Treatment of Surplus Funds |
| Adjustable-Rate Mortgage (ARM) | Unused funds are transferred directly to your available line of credit, becoming cash you can access and use for any purpose. |
| Fixed-Rate Mortgage | Unused funds are not given to you as cash. Instead, they are applied as a permanent reduction to your outstanding loan balance. |
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This creates a powerful incentive to choose an ARM if you anticipate a large repair set-aside. A borrower who manages their repair project efficiently is rewarded with extra cash if they have an ARM, but receives no such benefit with a fixed-rate loan.
The Step-by-Step Process: From Closing Day to Final Payment
The repair set-aside process is a formal, multi-step journey with clear responsibilities for you, your loan servicer, and your contractor. You are the project manager, and your loan’s good standing depends on your ability to execute each step correctly.
Step 1: Closing the Loan and Formalizing the Agreement At your loan closing, you will sign a legally binding document called the Repair Rider. This addendum to your main loan agreement specifies the exact repairs to be done, the total funds held in the set-aside, and the firm deadline for completion. Lenders typically set an initial 6-month deadline, which provides a cushion before HUD’s absolute 12-month final deadline.
Step 2: Hiring a Contractor and Completing the Work You are responsible for hiring a qualified contractor to perform the work. A major challenge here is that contractors are typically paid only after the work is 100% complete and has passed a final inspection. Many smaller contractors cannot afford to float the costs of labor and materials for weeks or months, which can limit your choices and potentially increase your costs.
Step 3: Documenting Completion Once the work is finished, your job is to gather the necessary paperwork. You must obtain a final, detailed invoice from the contractor and, most importantly, a signed lien waiver. The lien waiver is a legal document stating the contractor has been paid in full and gives up any right to place a mechanic’s lien on your property.
Step 4: The Final Inspection After you notify the servicer that the work is done and submit the paperwork, the servicer will order a compliance inspection from a third-party inspector. This inspector’s only job is to verify that all repairs listed on the Repair Rider have been completed satisfactorily. They do not inspect the quality of the work beyond ensuring it meets the requirement.
Step 5: Disbursement of Funds Upon receiving a satisfactory inspection report and all your documents (invoice and lien waiver), the servicer will release the funds from the set-aside to pay the contractor directly. The amount paid out is then added to your loan balance, and interest begins to accrue on it. Any surplus from the 150% holdback is then handled according to your loan type (ARM or fixed-rate).
Common Scenarios: The Repair Set-Aside in Action
Scenario 1: The Simple Cosmetic Fix
- The Situation: Maria’s home is appraised at $350,000. The appraiser notes peeling paint on the exterior trim, with a “cost-to-cure” estimate of $3,000.
- The Math: The repair cost ($3,000) is less than 1% of the Maximum Claim Amount, far below the 15% threshold. The lender creates a set-aside of $4,500 (150% of $3,000) plus fees.
- The Outcome: Maria hires a painter after her loan closes. The work is done in a week. She submits the invoice and lien waiver, the inspection passes, and the servicer pays the painter. The remaining $1,500 is added to her HECM line of credit because she chose an adjustable-rate loan.
| Action | Consequence |
| Maria’s home has minor, non-structural repair needs identified during the appraisal. | A repair set-aside is established, allowing the loan to close without Maria paying for the paint job upfront. |
| Maria completes the process efficiently and has an ARM loan. | The surplus funds from the 150% holdback are released to her as usable cash in her line of credit. |
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Scenario 2: The Major Repair That Pushes the Limit
- The Situation: David’s home has an MCA of $400,000. The appraiser notes the roof has less than two years of useful life and needs replacement, but it is not currently leaking. A contractor provides a bid for $55,000.
- The Math: The repair cost ($55,000) is 13.75% of the MCA, which is just under the 15% limit of $60,000. The lender establishes a large set-aside of $82,500 (150% of $55,000) plus fees.
- The Outcome: The loan closes, but a significant portion of David’s home equity is immediately locked in the set-aside. He successfully manages the roof replacement, and the contractor is paid. Because David chose a fixed-rate HECM, the surplus of $27,500 is applied to his loan balance, reducing what he owes but providing no extra cash.
| Action | Consequence |
| David’s home needs a very expensive but non-emergency repair that is close to the 15% limit. | The loan is approved, but a very large repair set-aside is created, tying up a substantial amount of his home equity. |
| David chose a fixed-rate HECM for the stability of the interest rate. | The large surplus from the set-aside is used to pay down his loan principal, giving him no access to the extra cash. |
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Scenario 3: Exceeding the 15% Limit
- The Situation: Frank and Susan’s home has an MCA of $300,000. The appraisal identifies multiple issues: rotten siding, several broken windows, and a damaged deck. The total estimated repair cost is $50,000.
- The Math: The repair cost ($50,000) is 16.7% of the MCA, which exceeds the 15% limit of $45,000. A full repair set-aside is not an option.
- The Outcome: To save the loan, Frank and Susan must pay for some repairs before closing. They use $6,000 from their savings to replace the windows. A re-inspection confirms this work is done, reducing the remaining repair cost to $44,000, which is now below the 15% threshold. The loan can now close with a set-aside to handle the siding and deck.
| Action | Consequence |
| The total cost of required repairs exceeds the 15% limit set by HUD. | The loan cannot proceed with a full repair set-aside. The borrowers are forced to find their own money to complete some repairs first. |
| Frank and Susan use personal savings to complete a portion of the repairs before closing. | They successfully reduce the remaining repair cost below the 15% threshold, allowing the HECM loan to finally close. |
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Mistakes to Avoid: Common Pitfalls That Lead to Disaster
The repair set-aside process is rigid, and mistakes can have severe consequences. The borrower is ultimately responsible for managing the project successfully. Here are the most common errors and their direct outcomes.
- Mistake: Hiring a contractor who demands a down payment.
- Why it’s a problem: Set-aside funds are only released after work is complete and inspected. The lender will not release funds for a deposit.
- Negative Outcome: You will have to pay the down payment from your own pocket. If you don’t have the cash, you’ll have to find a different contractor who is willing to work without an upfront payment, which can be difficult and more expensive.
- Mistake: Ignoring the completion deadline in the Repair Rider.
- Why it’s a problem: The deadline is a legally binding term of your mortgage. Missing it is an event of default, just like failing to pay property taxes.
- Negative Outcome: The servicer will immediately freeze your HECM account, stopping all monthly payments and blocking access to your line of credit. If the default isn’t cured quickly, the lender can call the entire loan due and payable, leading to foreclosure.
- Mistake: Not getting a signed lien waiver from the contractor.
- Why it’s a problem: Without a lien waiver, the contractor can legally place a mechanic’s lien on your home’s title, even after they’ve been paid. The servicer will not release final payment without this document because a lien threatens their collateral.
- Negative Outcome: The contractor won’t get paid, and you’ll be stuck in the middle of a dispute. If you can’t produce the waiver, you could be in default on your repair agreement, putting your loan at risk.
- Mistake: Authorizing work beyond what is listed on the Repair Rider.
- Why it’s a problem: The set-aside only covers the specific repairs approved by the underwriter. Any “while you’re at it” additions are not part of the agreement.
- Negative Outcome: You are responsible for paying for any extra work out of your own funds. If the cost exceeds the 150% buffer, you must cover the shortfall yourself, even for the required repairs.
Do’s and Don’ts of Managing a Repair Set-Aside
Navigating this process successfully requires careful project management. Following these guidelines can help you avoid common headaches and stay in compliance with your loan agreement.
| Do’s | Don’ts |
| Do communicate proactively with your loan servicer. Inform them of your progress, any potential delays, and ask for clarification on paperwork. They are your primary point of contact. | Don’t assume a verbal agreement with a contractor is enough. Get a detailed, written bid that matches the repairs on the Repair Rider and a formal contract. |
| Do get multiple bids from contractors. This ensures you are getting a fair price and helps you find a professional who understands and is willing to work with the post-payment requirement. | Don’t pay a contractor in full with your own cash upfront. The set-aside is designed to fund the repairs; using your own money defeats its purpose and you may have trouble getting reimbursed. |
| Do inspect the work yourself before notifying the servicer. Make sure you are satisfied with the repairs before you sign off on the final invoice and trigger the official inspection. | Don’t wait until the last minute to start the repairs. Contractor schedules, weather, and material delays can easily push you past your deadline. Start the process as soon as your loan closes. |
| Do keep a detailed file of all documents. This includes the Repair Rider, contractor bids, invoices, your signed lien waiver, and all correspondence with your servicer. | Don’t ignore letters or calls from your servicer. A lack of communication can be interpreted as non-compliance and may lead them to begin default proceedings. |
| Do ask your HECM counselor about the process upfront. Before you even apply, your mandatory HUD-approved counseling session is a great opportunity to ask detailed questions about how repair set-asides work. | **Don’t let a contractor pressure you into signing a completion certificate before the work is 100% finished to your satisfaction. |
The Ultimate Consequence: Default and Foreclosure
The requirements of the Repair Rider are not flexible. Failure to complete the specified repairs by the deadline is a direct violation of your loan agreement and is treated as a serious event of default. The consequences are swift and severe.
- Suspension of All Funds: The moment you are in default, the servicer is required to freeze your loan. Any monthly payments you were receiving will stop, and your line of credit will be locked. The only funds that can be disbursed are for completing the repairs or paying mandatory obligations like taxes and insurance.
- Loan Called Due and Payable: If you do not “cure” the default by completing the repairs in a timely manner, the servicer will seek HUD’s permission to accelerate the loan. This means they will declare the entire loan balance immediately due and payable.
- Foreclosure: Once the loan is called due, the servicer has the right to begin foreclosure proceedings to take possession of the property and sell it to recoup their investment. This is the final and most devastating consequence of failing to manage the repair set-aside process correctly.
State and Local Laws: An Extra Layer of Complexity
While the HECM program is federal, the repair process happens at a local level. State and local laws add another layer of rules you must navigate, particularly concerning contractors and property law.
- Contractor Licensing: States have vastly different requirements for contractor licensing and insurance. It is your responsibility to ensure the contractor you hire meets all local and state legal requirements. Hiring an unlicensed contractor can lead to poor workmanship and leave you with little legal recourse.
- Mechanic’s Liens: Every state has laws that allow contractors to place a lien on a property if they are not paid for their labor or materials. These laws vary significantly. In some “super lien states,” an HOA or contractor lien can even take priority over the mortgage, which is why servicers are so strict about obtaining lien waivers .
- Building Codes and Permits: The repairs must comply with all local building codes. For larger projects like roofing or deck repairs, this will likely require pulling permits from your city or county. Failure to do so can result in fines and may cause the work to fail the final compliance inspection.
Frequently Asked Questions (FAQs)
Can I do the repairs myself? Yes. In many cases, you can perform the work yourself. You will need to sign a “Homeowner’s Certification” form, and the completed work must still pass a final compliance inspection to ensure it meets FHA standards.
What if my contractor goes out of business mid-project? You are still responsible for completing the repairs by the deadline. You would need to hire a new contractor to finish the job and navigate any payment disputes with the original contractor, potentially involving legal counsel.
Can I get an extension on the repair deadline? Yes, it is often possible. Lenders usually set an initial 6-month deadline, while HUD allows up to 12 months. If you face legitimate delays, contact your servicer immediately to formally request an extension before your deadline expires.
What if the final repair cost is less than the contractor’s bid? The servicer will only pay the amount on the final invoice. The remaining funds from the 150% holdback are then considered surplus and will be released to your line of credit (ARM) or applied to your loan balance (fixed-rate).
Who can I complain to if I have a dispute with my lender or servicer? You should contact your regional HUD Homeownership Center (HOC). They are the regulatory body responsible for overseeing HECM lenders and can provide assistance with disputes that you cannot resolve directly with your servicer.