Reverse Mortgage Closing Costs
When your client is considering a Home Equity Reverse Mortgage (HECM), they may have questions about the reverse mortgage closing costs. Although reverse mortgage closing costs are similar to those of a traditional mortgage, there are some differences. When examining the closing costs, we see that they can be broken down into 3 categories: UFMIP/Mortgage Insurance, the Origination Fee, and Other/3rd Party Fees. Let’s explore each of these in more detail.
UFMIP or Mortgage Insurance
This is the Upfront Mortgage Insurance Premium that is charged by HUD and goes directly to HUD to insure the loan. It is the lesser of 2% of the home’s value or 2% of the max claim amount (the max claim amount is the highest home value HUD recognizes for lending purposes, which is $1,089,300 as of 01/01/23). This is typically the largest fee associated with a reverse mortgage and goes toward insuring the home loan.
The origination fee covers a lender's operating expenses associated with originating the reverse mortgage. As you probably know, originating a mortgage is no small task. HUD regulates what a lender can charge, which is the greater of $2,500 or 2% of the first $200,000 of your home's value + 1% of the amount over $200,000. Now this may sound like it can get very costly for high value homes, but the HECM origination fees are capped at $6,000, so your client can rest easy.
Other or Third-Party Fees
These are your standard closing costs; they are very similar to other mortgage transactions and will vary from state to state. In general, here’s what your client can expect to see in this category:
- Credit report fee. This verifies any current debts, loans, bill payment history, and any other financial information regarding the borrower.
- Appraisal fee. This cost is to cover the assessment of the home's fair market value. Appraisal fees vary by region, type and home value.
- HECM Counseling. All clients are required to receive counseling from an HUD-approved independent third-party before obtaining a reverse mortgage. The counseling fee covers the cost of this service.
- Flood certification. This cost is to determine whether the property is located on a federally designated flood plain.
- Escrow, settlement or closing. These types of costs generally cover a title search and various other required closing services.
- Document preparation. This is the cost to prepare the final closing documents, including the mortgage note and other recordable items.
- Recording Fee/State or County Tax Stamps. These fees are charged by the state, county or city that the property is located in to cover costs of recording and maintaining the mortgage lien.
- Title insurance. This insurance 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.
- Inspections. These expenses are charged when additional information is needed to determine the safety and soundness of the subject property.
- Survey. This is the cost to determine the official boundaries of the property.
As you can see, there is some overlap when it comes to the closing costs of a traditional mortgage and those of a reverse mortgage. Although there are some costs associated with a reverse that do not pertain to a traditional mortgage, the benefits of the reverse mortgage may make it worth it for your client. When sharing these with a client, it’s important to weigh the benefits of the reverse mortgage against the additional costs to close. These benefits can include no monthly mortgage payment* (or payment optionality), the loan’s non-recourse feature, and access to a line of credit which allows unused credit to grow.
If you want to get a clear estimate of a client’s reverse mortgage closing costs, you can easily run a quote in our LOS. If you’re not sure how to, visit the Training section of our Partner Portal for a video tutorial. And lastly, if you aren’t already a Smartfi® Partner but are interested in becoming one, let’s get in touch!
*Borrower must pay property taxes, insurance, HOA fees and maintain the property.
Closing costs discussed here are for a Home Equity Conversion Mortgage (HECM). This is not an exhaustive list and other costs may be applicable. All HECM closing costs are regulated by HUD. Closing costs may differ for single use reverse mortgages or proprietary reverse mortgages.
Our Smartfi Contributors are made up of a collective group of mortgage industry professionals, who share their personal opinions of the mortgage industry, topics, and various products. These are the express opinions of the Smartfi Contributor, and the article is based on their opinion and recommendations alone. It may not have been reviewed, commissioned or otherwise endorsed by Smartfi Home Loans, LLC.
Reverse mortgage proceeds may affect the eligibility and payments of Medicaid, SSI and similar program benefits. All clients should be advised to seek guidance on their financial situation with their financial planner/advisor. A reverse mortgage is not suitable for all clients in all situations.