If a home is in need of a major repair-- can we stipulate that the funds from the home equity (currently in underwriting) be used for that home repair? If the borrower applied for $140,000 and the cost of a new roof would be $40,000, can we require that the $40,000 be paid to the roofer?

Or, would we need to decline the loan due to insufficient collateral? The appraised value is there-- but we have major concerns about the repairs that are needed.

Just want to make sure I understand: The appraised value supports the loan request and the appraisal was done "as is" with the roof needing to be replaced?

On my own personal HELOC, our appraiser mentioned that the roof "was at the end of its useful life and needed to be replaced" but the valuation was done "as is" with our roof in the condition that it was in. Similar with your applicant?

Yes. Roof is in bad shape and contributed towards the lower appraisal coming back in.

But was the appraisal done "as-is"?

If you have reason to believe that without the repair your collateral value would deteriorate significantly in a short period of time, you would be within your right to deny the loan request until the repairs are made - whether they agree to do it out of the loan proceeds or themselves, it would be up to the borrower to choose and the bank to agree. You could not make such a stipulation in Texas on a Home Equity loan.

Yes-- appraisal done as-is.

If this weren't allowed in my state-- how would I find out? Does your law specifically state that no stipulations are allowed? I don't see anything in the mortgage or consumer loan law that discusses this.

Check with your legal counsel. Most likely not - I even misspoke on Texas - that grey area was closed a few years back but we still cannot require that the borrower repay any other debt except debt already secured by the homestead or debt to a lender other than the lender making the equity loan.

We have had this situation a few times. Since we cannot control how advances are used once the HELOC is closed we stipulate the needed repairs have to be made before a HELOC will be granted.

We usually end up doing a temporary loan for the cost of the repairs and we control the advances. Once the repairs are complete and pass inspection we will close the HELOC and pay off the temporary loan.

And I second Randy's comment. Simply because the collateral value is sufficient "as is" does not mean the collateral is acceptable "as is".