We prefer to take your full application once we’ve received your signed HUD Counseling Certificate. We can actually start your formal application prior to counseling, but we’ve found that in most cases our clients are much more prepared to move forward after they’ve had opportunity to meet with a counselor to validate information they’ve received. We want you to feel ready.
The application process requires at least one focused hour of each applicant to sign several FHA-required pages of documentation and disclosures. Springwater Capital prefers to deliver the application in person and to walk you through each section. This ensures you understand what you’re signing and that we have accurate and complete information. When preferred, we can also email you the full application and you can print it, sign it, and fax or scan it to us. We are very flexible and provide services catered to each client’s circumstance.
Even after completing your application, you are not obligated to close and you will not be charged any fees by Springwater Capital. However, at application you will sign a non-refundable credit card authorization for your appraisal and credit report.
New FHA rules require financial assessments of every client during the application process to ensure you have the financial means to continue paying property taxes, homeowners insurance and other property charges. While this isn’t the most convenient part of the process, we see it as a welcome change that protects our clients and the solvency of the FHA insurance fund.
We will analyze all income sources -- including pensions, Social Security, IRAs and 401(k) plans -- as well as your credit history. We will look closely at how much money is left over after paying typical living expenses. If we determine that you have sufficient income left over, then you won't have to worry about having any funds from the loan set-aside to pay for future tax and insurance payments.
If the lender determines that you may not be able to keep up with property taxes and hazard insurance payments, the borrower may be required to set-aside a certain amount of funds from the 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 servicer can pay your property charges either from a line of credit or by withholding monthly disbursements.
Costs of the Loan
The fees charged to you are capped and may be financed as part of the reverse mortgage. They can include the following:
We usually charge an origination fee which is used to cover our operating expenses and to pay our staff who work on your loan, including the advisor, processor, loan coordinator and underwriter.
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. However, we try to minimize this fee and sometimes we waive it depending on circumstance.
Mortgage Insurance Premium
An FHA Mortgage Insurance Premium (MIP) is required on every loan. There is an upfront fee based on the size of your initial loan proceeds, and then there is a 1.25% annual MIP on the “outstanding” balance of your loan. We’ll illustrate this below.
Consider MIP your insurance policy that your loan can be serviced and guaranteed until you sell your home or die. MIP is paid by you, out of the loan, to the Federal Housing Administration (FHA), to provide certain protections for you and the lender.
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 upfront MIP of 0.50 percent of the appraised value of the home. If, however, you take more than 60 percent, the upfront 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 to 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 fee is paid by every borrower before the loan is made, and it is non-refundable. We won’t know what you can borrow without knowing the home's appraised value.
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. You’ll be responsible for getting the repairs completed as soon as possible.
Other closing costs that are commonly charged are typical of any mortgage loan. Some of these do not apply depending on where you live or the condition of the home:
Credit report fee. Verifies any federal tax liens, or other judgments, handed down against the borrower. Cost: Between $20 to $50
Flood certification fee. Determines whether the property is located on a federally designated flood plain. Cost: About $20
Escrow, settlement or closing fee. Generally includes a title search and various other required closing services. Cost: 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: 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 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: Usually 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
Servicing Fee & Set-Aside
We typically do not sell or broker your loan to servicers that charge monthly servicing fees. You will know at the time of application whether it applies to your 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.
Most lenders have 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 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.
Springwater Capital will provide 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.