Reverse Mortgage Counseling
The average reverse mortgage applicant speaks with a specialist before considering a reverse mortgage or completing an application. The homeowner typically researches reverse mortgages using resources from a local reverse mortgage specialist. The homeowner may invest one to two months meeting with the specialist in person and reviewing the good faith estimate and other loan documents.
The application legally authorizes the lender to begin the application process but the lender cannot incur any costs on your behalf until Step 2 (counseling) is completed. The application is not binding and can be canceled at any point during the process. The application will specify the reverse mortgage fees, interest rates, and loan amounts.
Even though the application has been completed, the lender is not legally permitted to incur any costs on the applicant’s behalf (such as ordering the appraisal) until the applicant has submitted a signed HECM Counseling Certificate. This is proof that the applicant has completed the mandatory counseling session with a HUD-approved counseling agency. The counseling can be completed before or after the initial application in most states.
The appraisal establishes the legal value of the applicant’s property. The reverse mortgage appraisal must be conducted by an FHA-approved appraiser (not all appraisers have this approval) and it must follow a specific FHA format. This means that even if a homeowner has already had an appraisal, it will most likely have to be re-appraised at this point in the process.
The lender will confirm the applicant’s legal ownership of the property by conducting a title search and purchasing title insurance. They will also work with the applicant to clear up any issues with trusts, unpaid liens against the title, bankruptcies, etc. Once the lender has finished underwriting and has approved the application, it’s status will be changed to “clear to close”. This means that everything has been completed and the final closing date can be set.
The lender and the applicant set a closing date where a notary or attorney meets with the applicant to sign the final closing documents. This is the applicant’s opportunity to review the closing documents to make sure that the interest rate, fees, and loan amounts are the expected amounts. Once signed, the application goes into a three-day “right of rescission” period. This means that even though the closing has taken place, the applicant can still cancel the application with no penalty for three business days after the closing.
Iimmediately after this waiting period, the title company will issue a check to the homeowner (typically by overnight mail) if proceeds are available from the reverse mortgage. If the applicant was using a reverse mortgage to pay off an existing mortgage, the title company will also send the mortgage payoff amount to the lender.
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HUD certifies housing counselors around the country to provide homeowners with impartial education about reverse mortgages. Reverse mortgage counseling is a mandatory part of the reverse mortgage application process and is typically completed just after completing an application for a reverse mortgage.
Reverse mortgage counseling can be done over the phone or it can be done face-to-face with a regional agency.
After the counseling session, the counselor will mail a signed copy of the HECM Counseling Certificate to the homeowner. This certificate is presented to the lender with the reverse mortgage application. The loan application process cannot begin until counseling is completed and a fully executed counseling certificate is provided to the lender.
The cost of the counseling is typically $125, but the cost can vary. Lenders are not permitted to pay this fee for applicants. Homeowners can also contact the counseling agency to request a “hardship” approval to pay a reduced fee.
A list of counselors will be provided to you with your reverse mortgage proposal package.
The three largest closing costs are the FHA mortgage insurance, the origination fee, and escrow fees. However, the only cost that is typically paid out of pocket is counseling.
FHA Upfront Mortgage Insurance Premium (UFMIP)
One of the requirements for FHA insurance is that the borrower is charged an up-front mortgage insurance premium (UFMIP) fee (1) at closing and, over the life of the loan, is charged an annual MIP fee on the loan balance.
The mortgage insurance premium provides the following safeguards:
The origination fee is what the reverse mortgage lender earns on the loan. The FHA uses a formula to determine what the lender can charge. The formula is:
Title is required for all mortgages whether reverse or conventional. The largest part of title fees is title insurance. Title fees are usually broken down into:
An appraisal is required to determine your home’s value. A reverse mortgage appraisal is conducted by an FHA-approved appraiser and follows specific FHA guidelines that require more documentation than a typical appraisal. The cost of the appraisal can vary.
Interest and annual mortgage insurance premium accumulates on a reverse mortgage loan. However, instead of paying down the balance like you would on a traditional mortgage, the loan balance increases over time.
Interest Rate and Mortgage Insurance
The true interest rate is one and a quarter percentage points above the quoted rate because the total rate includes the FHA’s ongoing annual Mortgage Insurance Premium (MIP) charges. For example, if the quoted rate is 4.51%, with the annual MIP charges of .5%, the total rate would be 5.01%.
1The Upfront Mortgage Insurance Premium (UFMIP) is based on a percentage of the Max Claim Amount. The Max Claim Amount (MCA) is based on the lesser of your home’s value, the current maximum lending limit set by the Federal Housing Administration (FHA), or the purchase price (if purchasing a new home).
The process generally takes about 60-90 days from start to finish and has five major steps. However, the longest part of the reverse mortgage loan process can be the decision-making process that leads up to the application.
Once the application has been submitted, the processing of the reverse mortgage begins. The reverse mortgage processor orders the Credit Report, Appraisal and Title Report. The information on the application, such as bank deposits and payment histories, are then verified. Any derogatory credit, such as late payments, collections and/or judgments require a written explanation. The processor examines the Appraisal and Title Report checking for property issues that may require further investigation. The entire mortgage package is then put together for submission to the lender.
In general, to be eligible for a reverse mortgage, the youngest borrower on title must be 62 years old or older and have sufficient home equity. You must also meet financial eligibility criteria as established by HUD.
Determining whether or not there is sufficient equity in the home is an FHA calculation that takes into account:
You may need to set aside additional funds from loan proceeds to pay for taxes and insurance.
Most people applying for a home mortgage need not worry about the effects of their credit history during the mortgage process. However, you can be better prepared if you get a copy of your Credit Report before you apply for your mortgage. That way, you can take steps to correct any negatives before making your application.
A Credit Profile refers to a consumer credit file, which is made up of various consumer credit reporting agencies. It is a picture of how you paid back the companies you have borrowed money from, or how you have met other financial obligations. There are five categories of information on a credit profile:
NOT included on your credit profile is race, religion, health, driving record, criminal record, political preference, or income.
If you have had credit problems, be prepared to discuss them honestly with a mortgage professional who will assist you in writing your "Letter of Explanation." Knowledgeable mortgage professionals know there can be legitimate reasons for credit problems, such as unemployment, illness, or other financial difficulties. If you had problems that have been corrected (reestablishment of credit), and your payments have been on time for a year or more, your credit may be considered satisfactory.
By now, most people have heard of credit scoring. The most common score (now the most common terminology for credit scoring) is called the FICO score. This score was developed by Fair, Isaac & Company, Inc. for the three main credit Bureaus; Equifax (Beacon), Experian (formerly TRW), and Empirica (TransUnion).
The following items are some of the ways that you can improve your credit:
An appraisal is required to determine your home’s value. A reverse mortgage appraisal is conducted by an FHA-approved appraiser and follows specific FHA guidelines that require more documentation than a typical appraisal.
A reverse mortgage appraisal determines the property’s eligibility and estimated worth in order to calculate the available size of a reverse mortgage loan. The appraisal process has changed in recent years to introduce Appraisal Management Companies (AMC) that typically handle much of the coordinating and communication that goes on between appraisers and homeowners.
A complete FHA appraisal is required to obtain a reverse mortgage. In some instances, a 2nd appraisal can be required as well. It is at HUD’s sole discretion whether a 2nd appraisal is required. If two appraisals are required, the lower of the two values will be used for the reverse mortgage calculations. Proprietary (Non-HUD insured reverse mortgages) can also require two appraisals, but only when the home value is at or above $2 million.
All loans including reverse mortgages must adhere to Federal Appraiser Independence guidelines. Those guidelines stipulate that neither the homeowner nor the broker or lender can select the appraiser who appraises the home. It must be performed by an independently selected qualified appraiser.
Tips: Be sure to have smoke detectors installed in all bedrooms and a carbon monoxide detector in a main living area. Here in California you will want to be sure earthquake straps are installed on your water heater.
The appraisal. After tallying comparable sales and the complete picture of your home, the appraiser will deliver his or her appraisal to you and to your reverse mortgage broker or lender. On the final appraisal, you will see all of the data used in determining the value of your home.
Once the processor has put together a complete package with all verifications and documentation, the file is sent to the lender. The underwriter is responsible for determining whether the package is deemed an acceptable loan. If the loan is acceptable as submitted, the loan is put into an "Approved" status. If more information is needed, the loan is put into "Loan Condition Status" and the borrower is contacted to supply more information and/or documentation.
Once the loan is approved, the file is transferred to the closing and funding department. The funding department notifies the broker of the approval and verifies broker and closing fees. The closing broker then schedules a time for the borrower to sign the loan documentation.
At the closing the borrower should:
After the documents are signed, the closing escrow company returns the documents to the lender who examines them and, if everything is in order, arranges for the funding of the loan. Once the loan has funded, the closing escrow company arranges for the mortgage note and deed of trust to be recorded at the county recorders office. Once the mortgage has been recorded, the closing escrow company then prints the final settlement costs on the Closing Settlement Form. Disbursements are then made.
Reverse mortgages can have fixed or variable interest rates. Fixed rates remain the same for the duration that interest accrues. Variable rates have an underlying index and margin rate. When changes occur in the benchmark rate, the variable rate for a reverse mortgage can follow suit. This means the rate can move up or down in tandem with the benchmark rate.
Choosing a fixed rate for a HECM can offer some predictability in terms of estimating how much interest will accrue on the balance, but there is a caveat: You’re required to take all funds as a lump sum, as there is no credit line option. You could opt for installment payments with a variable rate HECM, but in that case it’s more difficult to calculate how much interest will accrue.
Contact one of our experienced reverse mortgage specialist today to discuss your particular mortgage needs or Apply Online and we will promptly get back to you.