You may be asking yourself how a no closing cost reverse mortgage is possible. Everyone knows that all loans have some costs associated with them and people have seen that many reverse mortgages carry pretty high initial fees. This is mostly due to the Initial or Up-Front Mortgage Insurance premium on the HUD Home Equity Conversion Mortgage (HECM) of 2% of the property value or the maximum lending limit, whichever is less.
In Fact, the number one downside that you normally hear spoken about Reverse Mortgages is that the costs involved to obtain a Reverse Mortgage are just too high.
No Closing Cost Reverse Mortgage Beginnings
HUD released the Saver version of the Reverse Mortgage product in an effort to bring a lower cost option to borrowers seeking a Reverse Mortgage.
However, they also limited the amount of money available to borrowers and so while lowering fees was a good idea (the initial mortgage insurance was just a fraction of the normal cost), not many borrowers felt it met their needs so they were unable to utilize the program. HUD eliminated the program in 2013 (it only ran from October of 2010 until September of 2013).
So, then we get back to the question of how can you say that no closing cost options are back then? That’s a great question and I would like to explain.
Lender Paid Closing Cost Credits
Firstly, all loans do come with costs. There needs to be a title report, a credit report, an appraisal, closing services and several ancillary third parties who provide different services (all at a fee) to close a loan.
However, in many instances, lenders may be able to provide the borrower a credit to pay for those costs. The only fee a lender may not pay for a borrower is the reverse mortgage counseling fee as that must occur from an independent company that is not paid for by the lender.
However, there may be free or assisted counseling that is paid by government grants or other support systems available to borrowers if you look for it. Counseling charges usually run between $125 and $175 and borrowers are often able to have this fee also paid for them with a little research.
Keep in mind that depending on the lender, the amount of the credit and the interest rate you will receive for the closing cost credit will vary.
Therefore, you should always compare but it is absolutely possible to get a reverse mortgage in many instances with very few or even no initial costs that you pay out of pocket, but that’s because someone else is paying them for you. And since those costs are being paid by the lender, it will affect the pricing they can offer to you.
Not All Loans Bring the Opportunity of the Same Credits
Since the lender will need to recoup the costs, they pay to third parties for your loan, they need to be able to recoup those costs when they complete your loan.
An exceptionally low loan amount typically doesn’t bring enough revenue to even pay the costs (Especially on a HUD HECM) so a lender would not be able to pay a borrower’s cost on such a loan but a jumbo loan might allow the lender more flexibility to pay some or all of the borrower’s costs. That’s why you see more of the jumbo or proprietary options offering little or no costs.
Lenders may still offer credits on HECM loans on which lenders cannot give enough lender credits to pay all the costs of the loan. In that case it would not be totally lender paid but borrowers should watch for these credits as well because they can still save borrowers thousands of dollars and the interest that would have accrued on this portion of the balance.
There might also be some ability to do more on HECM-to-HECM refinances when there is a very small mortgage insurance premium so it always pays to check.
Closing Cost FAQs
Are reverse mortgages expensive?
How much are closing costs on a HECM loan?
What reverse mortgage has the lowest closing costs?
How does the interest charge work on a reverse mortgage?
Is there an online reverse mortgage cost calculator?
FULL DISCLOSURE ON “NO CLOSING COST OPTIONS”
All loans have closing costs but some loans allow us to provide lender credits to pay those costs on behalf of the borrower. All loans and all borrowers will not qualify for no closing cost options.
PS – The last time I wrote an article about a No Closing Cost Reverse Mortgage was in 2008
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