If you proceed with the loan, you now select a lender. The person you will be dealing with is called a loan originator or reverse mortgage consultant.
You may be asked to provide some personal information, so that the loan officer can determine whether you are eligible for a reverse mortgage. Even if you are eligible, you are never obligated to get the loan. You will have opportunities to change your mind. You may be asked to select a loan payment plan. Payment plans can be fixed monthly payments, a lump sum payment, a line of credit, or a combination of these.
Lenders conduct “financial assessments” of every prospective reverse mortgage client during the application process to ensure you have the financial means to continue paying property taxes, homeowners insurance, homeowners association dues, and other property charges.
Lenders analyze all income sources — including pensions, Social Security, IRAs and 401(k) plans — as well as your credit history. They look closely at how much money is left over each month after paying typical living expenses. If a lender determines that you have sufficient income left over, then you won’t have to worry about having any funds set-aside to pay for future tax and insurance payments.
If, however, a lender determines that you may not be able to keep up with property taxes and homeowners insurance payments, they will be authorized to set-aside a certain amount of funds from your loan to pay future charges. The amount of the set-aside will be based on the life expectancy of the youngest borrower. If set-aside funds run out, you must continue paying property charges using whatever funds are at your disposal. Even if you don’t need a set-aside, you can still elect to have one established voluntarily. The lender can pay your property charges either from a line of credit or by withholding monthly disbursements.
The costs that the lender describe to you are capped and may be financed as part of the reverse mortgage. They can include the following:
The origination fee covers a lender’s operating expenses associated with originating the reverse mortgage.
A lender can charge the greater of $2,500 or 2% of the first $200,000 of your home’s value plus 1% of the amount over $200,000. HECM origination fees are capped at $6,000. Some lenders waive or reduce the origination fees on certain products.
(Note: Many of the calculations and fees on a HECM are based on the Maximum Claim Amount, which is the value of the home at the time of loan origination, but which currently has a maximum limit of $970,800.)
Mortgage Insurance Premium
The Mortgage Insurance Premium (MIP) is a fee paid by the borrower to the Federal Housing Administration (FHA), an agency of the federal government, to provide certain protections for both the lender and the borrower.
If the company servicing the loan can no longer meet its obligations, FHA assumes responsibility for the loan, providing the borrower with uninterrupted access to any remaining reverse mortgage proceeds.
In cases where the sale of the home is not enough to pay back the reverse mortgage, the insurance protects the borrower or estate from owing more than the sale price by covering losses incurred by the lender.
The MIP paid upfront equals two (2) percent of the home’s appraised value or FHA lending limit ($970,800), whichever number is less.
You also are charged a MIP on an annual basis — 0.5 percent of the outstanding loan balance — however this fee doesn’t come out of your available loan proceeds. Rather, it accrues over time and you pay it once the loan is called due and payable.
An appraiser is responsible for assigning a current market value to your home. Appraisal fees vary by region, type and value of home and can amount to several hundred dollars. It’s possible that you may have to pay for a second appraisal to ensure a proper home value.
This is the one fee generally paid in cash, often before the loan is made, and not with the loan proceeds.
In addition to placing a value on the home, an appraiser must also make sure there are no major structural defects, such as a bad foundation, leaky roof or termite damage. Federal regulations mandate that your home be structurally sound, and comply with all home safety and local building codes in order for the reverse mortgage to be made. If the appraiser uncovers property defects, you must hire a contractor to complete the repairs.
Once the repairs are completed, the same appraiser is paid for a second visit to make sure the repairs have been completed. Appraisers generally charge $125 dollars for the follow-up examination.
If the estimated cost of the repairs is less than 15 percent of the Maximum Claim Amount, the cost of the repairs may be paid for with funds from the reverse mortgage loan and completed after the reverse mortgage is made. A “Repair Set-Aside” will be established from the reverse mortgage proceeds to pay for the cost of the repairs. The homeowner will be responsible for getting the repairs completed in a timely manner.
Other closing costs that are commonly charged to a reverse mortgage borrower, which are the same for any type of mortgage, include:
- Credit report fee. Verifies any federal tax liens, or other judgments, handed down against the borrower. Cost: Generally between $20 to $50;
- Flood certification fee. Determines whether the property is located on a federally designated flood plain. Cost: Generally about $20;
- Escrow, settlement or closing fee. Generally includes a title search and various other required closing services. Cost: can range between $150 to $800 depending on your location;
- Document preparation fee. Fee charged to prepare the final closing documents, including the mortgage note and other recordable items. Cost: $75 to $150;
- Recording fee. Fee charged to record the mortgage lien with the County Recorder’s Office. Cost: can range between $50 to $500 depending on your location;
- Courier fee. Covers the cost of any overnight mailing of documents between the lender and the title company or loan investor. Cost: Generally under $50;
- Title insurance. Insurance that protects the lender(lender’s policy) or the buyer (owner’s policy) against any loss arising from disputes over ownership of a property. Varies by size of the loan, though in general, the larger the loan amount, the higher the cost of the title insurance;
- Pest Inspection. Determines whether the home is infested with any wood-destroying organisms, such as termites. Cost: Generally under $100;
- Survey. Determines the official boundaries of the property. It’s typically ordered to make sure that any adjoining property has not inadvertently encroached on the reverse mortgage borrower’s property. Cost: Generally under $250
(Note: Cost estimates can change over time. For most current costs, consult a lender. Also, some states may have local fees that are not included here.)
Servicing Fee & Set-Aside
A lender typically earns monthly fees, known as servicing fees, for its administration of the loan. These can be a fixed monthly amount or calculated into the interest rate on the loan. If a fixed monthly amount is to be charged, an amount of funds will be “set-aside” from the loan proceeds, to be used to pay this monthly fee.
The service fee set-aside is deducted from the available loan proceeds at closing to cover the projected costs of servicing your account. Federal regulations allow the loan servicer (which may or may not be the same company as the originating lender) to charge a monthly fee that is no higher than $35. The amount of money set-aside is largely determined by the borrower’s age and life expectancy. Generally, the set-aside can amount to several thousand dollars.
Many lenders have either eliminated the servicing set-aside or included it in the interest rate. (Note: The servicing set aside is just a calculation and not a charge. The only amount added to your loan balance is the monthly servicing fee, which is typically $35 per month or less.)
With a reverse mortgage, you are charged interest only on the funds (loan proceeds) that you receive. For example, if you take your loan proceeds as a line of credit, you are only charged interest on the portion of the line of credit you have withdrawn.
The interest is compounded, which means you pay ongoing interest on the principal, plus accumulated interest.
Reverse mortgage products are available with both fixed interest rates and variable interest rates. The variable rate is tied to an index, such as the U.S. Constant Maturity rate. plus a margin determined by yield requirements in the financial markets. The margin is set at the time of loan origination and does not change over the life of the loan. During the life of your loan, the loan balance increases by the amount of compounded interest accrued.
Because there are no payments made by the borrower during the life of a reverse mortgage, interest is not paid on a current basis. It does not have to be paid out of your available loan proceeds either, but instead accrues, at a compounded rate, through the life of the loan until repayment occurs at the end
Your lender will supply you with a large package of additional disclosure documents that are designed to help make the process as transparent as possible.
One such document is the Total Annual Loan Cost (TALC) Disclosure, a form required by the Federal Reserve Board on all reverse mortgage transactions, that illustrates the cost of the loan if it is outstanding for different durations of time.
The Good Faith Estimate clearly discloses line-by-line the various fees that are being charged. Other disclosures, like an amortization table, illustrate the amount of interest that will accrue, so that you are fully informed about the costs associated with getting a reverse mortgage.
The application process formally begins after counseling, once you provide the lender with your loan application and the signed disclosures as well as required information, including verification of a Social Security number, a copy of the deed to your home, information on any existing mortgage(s), and a signed counseling certificate (signed by both the homeowner and counselor).