Steps to a Reverse Mortgage
You are 62 years or older and you own a home. You have heard how a reverse mortgage can allow you to borrow against the equity in your home while you still live in it and do not have to pay back until you leave the home permanently. No more monthly mortgage payments.
This might be the right financial solution for a current or future needs. You can use a reverse mortgage to pay off your existing mortgage and lower your monthly expenses. You can use it to pay for health care. Or it might just provide you with the peace of mind that comes from knowing you have cash available. The following are the steps involved in a reverse mortgage transaction. Click on the links below for details on each step.
How do you begin to learn about a reverse mortgage? You contact a Golden Equity Mortgage (GEM) reverse mortgage professional, we specialize in these loans.
All GEM members must adhere to a Code of Ethics & Professional Responsibility and the Pledge to Reverse Mortgage Borrowers in which they promise to serve you with integrity and professionalism. Your best interests are loan officers' only consideration.
A GEM Representative will:
- Present you with a full range of reverse mortgage products that are available from his/her company;
- Explain the terms, benefits and costs of each product;
- Clearly explain his/her responsibilities to you;
- Clearly explain your responsibilities under the terms of a reverse mortgage, including paying property taxes on time, maintaining insurance and maintaining your home in good condition;
- Carefully review your income, assets and expenses to help you assess whether you can meet these obligations and determine whether the reverse mortgage is the best financial product for your situation;
- Meet with you as frequently as you need and, at your request, also meet with other members of your family or your financial advisors;
- Explain that, according to Federal statute, you must complete a reverse mortgage counseling session and provide you with a list of HUD-approved counselors you may contact. (As a means of maintaining a hands-off relationship so that you get unbiased third-party advice, a lender is not permitted to recommend any specific counselor);
- Prepare you for making your counseling session the most effective by providing you with questions you might want to ask and information you should confirm.
Counseling is required for all HECMs. Reverse mortgages are the only financial product (perhaps the only product, period) that require this. Why? Caution. Because reverse mortgages are designed for an older audience who are often on fixed incomes and involves what is usually everyone’s most valuable asset—their home—government and the reverse mortgage industry want to make sure you have all the information you need to make the right decision. A counseling session can take place either face-to-face or by telephone. Counselors have been trained to deliver the required information either way. The session should generally last 90 minutes but can take longer as needed.
Loan originators are not permitted to direct you to a specific counselor or counseling agency. Instead, they are required by HUD to provide a list of counselors, including local agencies and national intermediaries who are selected by HUD to provide counseling by telephone across the country.
Best case scenarios indicate that scheduling a counseling session will take three to ten business days from the time you place the call to the counseling agency.
Reverse mortgage “counseling” is not
therapeutic or psychological counseling.
It is most comparable to tutoring, extra help
in understanding something that can seem
complicated due to all the details. The
counselor will go over much of the same
information provided to you by a lender.
Prior to being counseled, you will receive an information packet from either the counseling agency, or the lender, depending on who you contact first. This information packet will include the following materials:
- An informational document called "Preparing for Your Counseling Session" (click HERE to view a copy)
- A printout of loan comparisons, so the counselor may review what you are potentially eligible to receive from the reverse mortgage
- A printout of the Total Annual Loan Cost (TALC) Disclosure required by the Federal Reserve Board on all reverse mortgage transactions. This form illustrates the cost of the loan if it is outstanding for different durations of time.
- The National Council on Aging (NCOA) booklet, Use Your Home to Stay at Home – A Guide for Homeowners Who Need Help Now. Click HERE to view a copy in English or click HERE to view a copy in Spanish.
No fees may be incurred by you or on your behalf prior to completion of mandatory counseling.
A counselor will:
- Explain a reverse mortgage to you;
- Explain the various reverse mortgage product options;
- Explain the costs;
- Utilize a Financial Interview Tool (FIT) to help you determine if you can afford a reverse mortgage and meet your financial obligations, such as paying your taxes and insurance;
- Draw your attention to alternative options that might be available to you, such as property tax deferral programs;
- See if you might be eligible for grant money or other financial assistance by utilizing BenefitsCheckup, a tool for identifying services, such as housing assistance, tax deferral programs, home repair grants or loans, food stamps, fuel assistance, social services or healthcare;
- Explain the consequences affecting the prospective borrower’s eligibility under state or federal programs and the impact on the estate or your heirs;
- Review the loan comparisons provided to you by the lender as well as the Total Annual Loan Cost disclosure;
- A counselor will not recommend that you obtain a specific product from any particular lender. His or her role is to provide information and clarity but not to advise;
- Counseling generally costs in the vicinity of $125-250 per session. Some counseling agencies are awarded various grants that sometimes enable them to offer the service free of charge.
- When you complete the session, both the counselor and you will sign a counseling certificate verifying you have fulfilled this requirement.
If you decide to proceed with the loan, you now select a lender. The person you deal with will be 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 or 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.
At some point in 2014, lenders will begin conducting financial assessments of every prospective reverse mortgage client during the application process to make sure you have the financial means to continue paying property taxes, homeowners insurance and other property charges.
Lenders will analyze all income sources -- including pensions, Social Security, IRAs and 401(k) plans -- as well as your credit history. They will look closely at how much money is left over 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 hazard 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 will 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.
Under the HECM program, which accounts for most reverse mortgages made in the U.S. today, the maximum origination fee allowed is 2% of the initial $200,000 of the home's value and 1% of the remaining value, with a cap of $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 $625,500.)
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 in a HECM reverse mortgage.
If the company servicing the loan is interrupted, FHA assumes responsibility for the loan, providing the borrower with uninterrupted access to proceeds from his or her reverse mortgage.
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 at closing is based on the amount of funds withdrawn during the initial year.
As long as you don’t take more than 60 percent of the available funds in the first year, you will be charged an intial MIP of 0.50 percent of the appraised value of the home. If, however, you take more than 60 percent, the intial MIP will be 2.50 percent.
On a $200,000 home, 2.5 percent is $5,000 versus $1,000 if you were paying 0.50 percent.
You also are charged MIP on an annual basis, 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. The annual premium is equal 1.25 percent of the outstanding loan balance.
An appraiser is responsible for assigning a current market value to your home. Appraisal fees vary by region, type and value of home, but average $450.
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 $10 to $20;
- Flood certification fee. Determines whether the property is located on a federally designated flood plane. Cost: Generally about $8 to $12;
- Escrow, settlement or closing fee. Generally includes a title search and various other required closing services. Cost: can range between $250 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: $125 to $150;
- Recording fee. Fee charged to record the mortgage lien with the County Recorder’s Office. Cost: can range between $50 to $250 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 $30 to $75;
- 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 $100 to $150;
- 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.
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 1-Yr. Treasury bill or the 30-Day LIBOR (London Interbank Offered 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 required for 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).
The lender orders an appraisal by a professional appraisal firm. It is paid for by the homeowner. This determines the market value of the home. However, the final value is not established until the Loan Underwriter employed by the lender reviews the appraisal and approves it.
After receiving all pertinent information from the homeowner and obtaining other required items, the loan package is submitted to the Loan Underwriter for final approval. It generally takes anywhere from 1-5 days to underwrite a loan. Underwriting involves verifying all information and making sure the loan complies with all laws and regulations.
A conditional approval is provided with a final home value and any repairs or additional inspections required, as well as anything else the lender may need in order to issue a final approval, so the loan can close.
Your home is the collateral for a reverse mortgage and must be maintained to meet HUD standards. As part of the loan origination process, your lender may order an inspection of your home and the inspector will deliver a report indicating if repairs are required. If so, a portion of your loan will be set aside to pay for those repairs. It is your responsibility to hire a contractor to do the repairs. Once the repairs are completed, the contractor will sign a lien release form. Then the completed repairs will be inspected. At that point, the Servicer will disburse the funds from the set-aside to pay the contractor and return any remaining funds to your loan proceeds.
- A borrower has one year from the closing date of the loan to complete the repairs. If repairs are not completed, loan payments will be suspended until they are completed or the Servicer may request that HUD deems the loan due and payable.
Once the loan application has been approved, a closing (signing) of the reverse mortgage is scheduled with a title agent or attorney (depending on the state). The lender should confirm the payment plan the borrower wishes to receive (i.e. amount of fixed monthly payments, line of credit), plus any requested cash the homeowner wishes to receive in a lump sum at funding. Closing documents and final figures are prepared. Closing costs are normally financed as part of the loan, but the homeowner is allowed to pay any costs in lieu of financing, if they so choose.
There is a limit on the amount of money that can be withdrawn in the first year. If you are eligible to withdraw $100,000, for example, you would be allowed to get only $60,000, or 60 percent of that sum, in the first year. There are exceptions. You can withdraw a bit more if you have an existing mortgage, or other liens on the property, that exceed the 60 percent limit. You must pay off these "mandatory obligations" as the government calls them, with your reverse mortgage. You can withdraw enough to pay off these obligations, plus another 10 percent of the maximum allowable amount -- in which case that's an extra $10,000, or 10 percent of $100,000.
A reverse mortgage must be the only lien on a property. This means, in order to obtain a reverse mortgage you must pay off any existing mortgage(s) or other obligations for which a lien has been placed on the property. You can use your reverse mortgage proceeds to pay off the mortgage or other obligations.
If existing liens are identified, the payoffs are updated accordingly. Your closing agent will pay off all existing liens, verify taxes are paid and make sure that you have a current homeowner’s insurance policy.
Before closing on a reverse mortgage, you may consider seeking the advice of a tax professional or elder law attorney in the event you are faced with a situation that can affect your taxes, Medicaid or SSI eligibility. Social Security and Medicare are not impacted at all by a reverse mortgage.
Under the best case scenario, it takes a few business days to confirm all fees and payoffs, schedule a closing date, prepare the documents and communicate to all parties involved. Closing agents who are NRMLA members will not pressure you to close by a certain time frame that you are unable to meet or uncomfortable meeting. And you still have an opportunity to change your mind.
The homeowner has three business days after signing the papers to cancel the loan. (These three days are known as the "Right of Rescission" period.)
Upon expiration of this period, the loan funds are disbursed. The homeowner accesses the funds in the form of the payment option selected. Any existing debt on the home is paid off. A new lien is placed on the home. The homeowner may use the loan proceeds for any purpose.
The only exception to a homeowner's right of rescission is on a HECM for Purchase reverse mortgage. There is no rescission option on a purchase money mortgage.
You can choose to receive the money from a reverse mortgage all at once as a lump sum, in fixed monthly payments either for a set term or for as long as you live in the home, as a line of credit, or as a combination of these.
If you select fixed payments, you loan Servicer will disburse them on the first business day of each month.
As a borrower, you have the right to change your payment plan at any time. You simply request a new Payment Plan Agreement form from your Servicer. A change may include a small administrative fee of no more than $20. Once the agreement is executed, the new payment plan will go into effect the first business day of the next month.
After the loan closes, a loan “Servicer“ manages the account and is responsible for disbursing monthly payments to the homeowner (if this payment option is chosen), advancing funds from the line of credit upon request, collecting any voluntary repayments and sending periodic statements.
The Servicer is also responsible for monitoring to make sure that real estate taxes are paid, insurance is maintained on the home and the borrower continues to live in the property.
A Servicer who is a NRMLA member will always be available to make sure you are aware of the current loan balance and all costs, as well as answer any questions you might have about your reverse mortgage.
A reverse mortgage borrower is responsible for staying current on his/her real estate taxes and homeowner's insurance. As a borrower, you can pay the taxes yourself or establish a set-aside account and have the Servicer pay them for you. If you go into arrears on your taxes and insurance, you take the chance of going into default. When your loan is in default, your Servicer will request that HUD deem the loan due and payable. Additional counseling is available to those who find themselves in default. Your Servicer will help you find a counselor. A counselor will work with you to try to set up an acceptable repayment plan.
The Servicer has internal systems in place to inform and alert you if there are any tax and/or insurance issues with your loan and will notify you promptly if you fall behind on either responsibility.
Servicers have also implemented safety nets that are intended to prevent borrower fraud, identity theft or outside parties taking undue advantage of borrowers.
The homeowner is not required to make any monthly mortgage payments during the life of the loan. The loan is repaid when the homeowner or last surviving spouse on title ceases to occupy the home as a principal residence.
The reverse mortgage is a non-recourse loan, which means no debt will be left to the heirs and if the loan balance is less than the market value of the home, the additional equity is retained by the homeowner/heirs (if the home is sold).
All reverse mortgage borrowers must be at least 62.
If a name is removed from the title, that person is no longer an owner of the home. When the person whose name is on the deed passes, the surviving spouse or the heirs are responsible for informing the loan servicer. Servicers also audit deaths of borrowers using a variety of tools. Future payments stop at death, but interest, mortgage insurance premiums and homeowner's insurance continue to accrue until the loan is settled. The Servicer will mail a notice to the surviving spouse or heirs informing them the loan is now due and payable. The surviving spouse or heirs are responsible for paying back the reverse mortgage. The loan can be paid back out of other resources or by selling the home. If there is a balance from the sale of the home after the reverse mortgage is paid, it belongs to the heirs.
When the borrower sells or conveys title of the property, passes away or does not maintain the property as principal residence for a period exceeding twelve months due to physical or mental illness, you have reached what is called a “maturity event.” This means the loan is due and payable. You or your estate will work closely with the Servicer to ensure your loan is paid in full in a timely manner.
The estate will have six months to satisfy the debt. In the fifth month, you will receive a letter from the Servicer advising you have 30 days to settle the loan, but can request a 90-day extension, which must be approved by HUD. You may also request a second 90-day extension. If the 30-day demand letter is not responded to, or after the 90-day approved extensions expire, or if the borrower has no heirs to help pay off the loan, then the Servicer may initiate foreclosure.
If, however, you or your estate are actively working to either refinance your property or sell your property so as to satisfy your reverse mortgage, then foreclosure may be forestalled.
The key to a proper and clean end to a loan is to work closely with your Servicer from the time the loan is called due and payable.