In my previous post I discussed the one fee or expense on reverse loans that conventional mortgages do not have. And that was the FHA insurance premium for MIP.
Conventional mortgages allow what some would call “Lender junk fees”, which typically are for processing, underwriting and other “back office” costs the lender will pass on to the borrower. And they can add up to additional $1800 to $2000 on a traditional mortgage.
But they are not considered “allowable fees” to a reverse mortgage borrower and cannot be charged and built into the loan.
What are the fees that a reverse loan applicant can expect?
- Flood Certificate – Pulled by the Appraiser
- Appraisal fee
- Credit Report
- All title settlement, title insurance, transfer fees and recording fees. These are based on the loan amount, the Title company and county or state.
- Document preparation fee
- Payees; all third party fee and third party providers must be disclosed on the HUD-1 Settlement Statement per RESPA. List all required loan fees, including fees paid outside of Closing on their worksheets.
All HECM/Home Equity Conversion Mortgage are subject to FHA’s requirements on allowable closing costs.
In my next post I will provide a list of fees that are not allowable and cannot be passed on to the borrower.
In my previous post I described what IMIP is in regards to Reverse mortgages and that it is one of the fees listed as a Closing Cost for all borrowers.
Let’s pick up where I left off in the earlier post.
The other benefit to paying this insurance premium, is that in the event and if for any reason the Lender who is servicing the borrower’s Line of Credit should cease to exist and or are unable to provide funds to the borrower from their Line-of-Credit, the borrower is protected, because their loan and funds in the LOC are insured by FHA.
Any money left in the borrowers account will continue to be available to them regardless of whether or not the company servicing their loan continues to exist.
The IMIP protects the borrower, their funds in the Line-of-Credit and the heirs to the estate and that’s very reassuring and beneficial to everyone who has a reverse loan and to their family.
Sometimes the consumer is confused about what MIP and PMI are and there is a difference between them. PMI is used in conventional mortgage financing whenever a borrower will have less than 80% in equity.
This is typically seen when someone is buying a home and coming in with a small down payment. PMI protects the Lender in the event the borrower ceases to make mortgage payments on their loan and there is a foreclosure. PMI gives the Lender some protection by having the loan insured against this possibility.
PMI is for traditional financing and IMIP is for FHA government insured loans.
And there you have it.
Fees or “costs” for a reverse mortgage are identical to what the fees are for traditional real estate loans, with a couple of exceptions and I’m going to discuss one of those exceptions in this post.
I discussed this topic previously, but I thought that I would go into more detail about the IMIP that is always charged on FHA loans and just what it is, because it is the most expensive but important fee that is charged on all reverse mortgages.
Reverse loans never have a required mortgage payment and there is no loan term to be concerned about, but the interest that is owed each month on it will compound over the life of the loan and one of the important purposes of the Initial Mortgage Insurance Premium / IMIP is to guarantee that no matter how much is owed when the loan becomes due ( the death of the last borrower and or the estate selling the home), they can never owe more than the present value of the property.
In other words, if the loan is larger than what the property is worth, the IMIP will pay the difference, not the borrower or their heirs. They are completely protected and not liable for the repayment of any funds that exceed the current value of the property.
This is referred to as a “Non-Recourse” mortgage.