Understanding Reverse Mortgage Loan Closing Costs

Understanding Reverse Mortgage Loan Closing Costs

Will reverse mortgage closing costs, interest rates, and other features affect your client’s decision to take out a loan? Brookings Institution reports that less than 1% of eligible property owners have taken advantage of a reverse mortgage option in the past, but it is well worth exploring if they have equity in their home. 

At Smartfi Home Loans, we’re here to help. Today, we’ll discuss everything your client needs to know about reverse mortgages below, including how a homeowner aged 62 or older** could use this resource to supplement their income. 

What Is a Reverse Mortgage?

Simply put, a reverse mortgage loan gives older American homeowners a way to turn their home’s equity into cash. The funds they receive can be used for almost anything, including paying off their existing mortgage (required as part of the loan), eliminating credit card debt, medical and other bills, or simply improving their retirement lifestyle.  

The most common type of reverse mortgage is called a Home Equity Conversion Mortgage, or HECM and is insured, and regulated, by the Federal Housing Administration (FHA). Being regulated by the FHA means a HECM has certain features in place to protect borrowers; one of which is a counseling requirement. Since the loan is insured by the FHA, the borrower will never owe more than the value of the home when the loan comes due. 

Instead of traditional monthly mortgage payments, a reverse mortgage is normally paid back at the end of the loan term in one lump sum when the homeowners permanently leave the home. During the life the loan, the borrower is only responsible for paying property taxes and insurance, any HOA fees and for maintaining the property. 

Reverse mortgages provide substantial proceeds to the homeowner – as much as 60% -70% of their home’s value. The older they are, the more money they are initially eligible for. The amount they can borrow depends on their age, property value, and interest rate. 

Loan amount calculation is based on: 

• Age of the Youngest Borrower 
• Appraised Home Value 
• Current Interest Rate 

Other factors to know:  

•  The property must be FHA approved. 
•  Qualification is based on the youngest borrower on the application.** 
•  Primary residence means that the borrower must reside at the property consecutively for six months and one day per year. 
• The borrower must continue to pay property taxes, home insurance, any HOA fees, and maintain the property. 
• Reverse mortgages can be used to pay off existing mortgages on the borrower’s home. In fact, if they have a traditional mortgage, it is required that they pay off this mortgage (and any additional liens on the property). 

Origination Fee

An origination fee is a standard requirement when closing a loan. The FHA strictly regulates loan costs for non-proprietary loans to cover the lender’s operating costs and protect the borrower. 

Lender Servicing Fee

The lender servicing fee will also cover the lenders’ administration costs, title insurance, other insurance, and monitoring taxes. 

Other Reverse Mortgage Closing Costs

In most cases, a borrower can also expect to pay several closing costs to the financial institution that underwrites their debt, including: 

• Title Insurance: Protects the borrower and lender against potential losses surrounding property ownership disputes. 
• Credit Report Fee: Charged to verify a borrower’s credit history and check existing judgments or liens. 
• Documentation Preparation Fees: Covers the preparation of final closing documents. 
• Appraisal Fees: Borrowers pay the appraisal fee paid to the appraisal management company (to cover any appraisal costs on the property’s repair needs). 
• Flood Certification Fee: Covers floodplain assessment. 
• Pest Inspection Fees: Covers pest infestation checks. 
• Courier Fee: Funds the delivery of documents between the lender of the loan, investor, and title company. 
• Recording Fee: Funds the recording of the mortgage lien with the county clerk. 
• Settlement (Closing or Escrow Fees): Covers any closing service fees like a title search. 
• Survey Fees: Funds the surveyor’s confirmation of the property’s boundaries. 
• FHA Mortgage Insurance Premium: Mortgage insurance premiums on FHA-approved loans to protect the lender if the borrower defaults on the mortgage payment. 
• FHA Counseling Fees: Paid directly to a U.S. Department of Housing and Urban Development HUD-approved counseling agency for mandatory sessions. 

Reverse Mortgage Loan FAQs

Common Questions

Reverse mortgages are a safe and secure financial tool, but sometimes a few misconceptions come up. Let’s go over some common questions and concerns so your client can understand the facts. 

Does the bank own the borrower’s home? 

No, the bank never owns the borrower’s home. They remain the owner of their home and can stay as long as they wish. As the homeowner, they must continue to pay home insurance, property taxes, any HOA fees and keep up basic home maintenance during the loan period. 

When the home is sold, the loan is repaid (including accrued interest and any fees) and any remaining equity goes to the homeowner or their heirs. 

How much can be borrowed?

Three factors are considered to calculate how much equity the borrower can access: 

• The age of the youngest borrower  
• Home value  
• Current interest rates  

Although the original home value that is initially provided to calculate the preliminary loan amount is used, an independent appraiser must visit the borrower’s home to ascertain the current value of their home. The loan amount is then re-calculated according to this official home value. 

What if the borrower already has a mortgage? 

That is absolutely fine. 

If the borrower qualifies, a reverse mortgage will first pay off their existing mortgage and then give them the remaining proceeds. In fact, many of our partners’ borrowers use a reverse mortgage for that purpose—to eliminate monthly payments* on their traditional mortgage. 

Will the borrower’s children lose their inheritance?

The borrower’s children have options when it comes to their home. Typically, the loan is repaid through the sale of the home. Their heirs can choose to sell the home, pay the loan and receive any remaining equity; or they can purchase/refinance the home, and pay back the loan with a traditional mortgage.

Does a reverse mortgage require that the borrower make monthly payments? 

There are never any monthly mortgage payments required. However, payment of taxes, insurance, any HOA fees, and general upkeep of the home are the responsibilities of the homeowner. The loan becomes due when the last borrower permanently moves out of the home. 

What can your client use their reverse mortgage for? 

The tax-free money the borrower receives is intended to support their retirement lifestyle. The funds can be used now, later or kept for an emergency – it’s all up to them! 

• Increase monthly cash flow 
• Pay off an existing mortgage (required as part of the loan) 
• Pay credit card bills 
• Pay medical bills 
• Fund home repairs and improvements 
• Pay property taxes and home insurance 
• Travel 
• Gifts 
• Improve their lifestyle 
• Invest or diversify their retirement portfolio 
• In–home care  

Reverse Mortgage Safeguards

Consumer safeguards are created to ensure the borrower and their family understand how a reverse mortgage works. Here are just a few of the important consumer safeguards put in place for their benefit: 

Counseling

The U.S. Department of Housing and Urban Development requires all reverse mortgage applicants, whether they be obtaining a HECM (Home Equity Conversion Mortgage), Smartfi^® Choice, or other reverse mortgage, to undergo third party counseling so that they feel completely comfortable with the process and understand all their options. 

No Prepayment Penalty

The borrower can choose to repay the loan at any time without incurring any additional costs.

Non-Recourse Loan

A non-recourse loan protects the borrower from being held liable for the loan beyond the value of the home. Their financial obligation to the lender will not be more than the home’s value when the reverse mortgage loan comes due and payable. 

Addressing Other Concerns About Reverse Mortgages

Borrower Responsibilities

Taxes and Insurance

The borrower is required to remain current on their property taxes, home insurance, and if applicable, condo fees and homeowner association fees.

Property Maintenance 

The borrower is responsible for completing mandatory repairs and basic home maintenance during the life of the loan.

Occupancy Requirements 

The home must be the borrower’s principal residence which means they need to live in their home consecutively for six months and one day of the year. 

Plan your client’s financial future with complete peace of mind with Smartfi’s reverse mortgage products. Call (877) 816-6706 or contact us online today to learn more about how to tailor reverse mortgage closing costs to suit their needs.