Processing Reverse Mortgages

Have you ever received a call asking if you process or originate Reverse Mortgages and felt compelled to answer, "Of course, I do!" when you were wondering where to start?

This article is a step-by-step guide to processing your first Reverse Mortgage. If you are an originator, please use this as a helpful guide to the loan steps and what to expect.

Terminology: Reverse vs. Forward

In the Reverse Mortgage world, we consider non-reverse mortgages to be "Forward" mortgages. An FHA 30-year fix is a Forward mortgage, and a Convention Purchase is a Forward Mortgage. A VA loan is a Forward Mortgage. For short, we say "Forward" or "Reverse."

Now, let's get going!

Pre-Submission:

• Loan Quote or Proposal
• Counseling Certificate
• Application
• Borrower Docs
• Appraisal
• Submission

Loan Quote or Proposal

The first step of the loan process is gathering basic borrower information. This is like taking an application on a "forward" mortgage, with one main difference. You cannot give the borrower an accurate Reverse quote without their Date of Birth. The youngest borrower's date of birth will affect the Principal Limit on the loan and the amount the borrowers can borrow. This is unlike a Forward mortgage, where the DOB does not affect pricing, loan terms, or qualifying (as long as the borrower is 18 years or older).

Once the Loan Originator gathers the borrower information, you send a "Loan Quote" or "Proposal". Different lenders and Loan Operating Systems call these different names. Knowing that the loan quote is not the loan application is essential. The Loan Quote is sent before the Loan Application. The primary purpose of the loan quote is to:

• Disclose the terms of the loan you are offering to the borrower
• Provide a list of Counselors the borrower can use in the Reverse Mortgage Counseling Process.

Reverse Mortgage Counseling Certificate

All reverse mortgages require the borrower to attend Reverse Mortgage Counseling and receive their Counseling Certificate. There are some exceptions to this rule, where the borrower can waive Counseling, but it always requires the borrower to have been to Counseling once.

The borrower can choose from the list of counselors you provided in your quote, or they can find their own. You are not allowed to steer the borrower to a preferred counselor.

The borrower is usually charged a fee for Counseling. As of 04/14/2023, this fee is between $100 and $200. In some instances, a counseling service will waive the fee or defer it for 90 days.

The Loan Originating Company cannot pay for the borrower's Counseling. This is a big no-no. Borrower Counseling should be of free will and un-coerced.

Counseling will take between 15 minutes and 1 hour and can be done over the phone.

Application

The application can be sent along with the Loan Quote, or it can be sent separately. Lenders may say you need to send the Loan Quote and have the borrowers attend Counseling before you send the application, but don't let this stop you. Nothing in lending guidelines says you cannot send the loan application along with the proposal. Doing this will save you time and keep things simple for the borrower. If the borrower is signing physical loan disclosures instead of e-sign, this will also allow them to return borrower docs in the same packet as their loan application.

You must walk through the application with the borrower. If they are ink-signing disclosures, it is common for them to miss a signature line or date.

Borrower Docs

This is also a good time to review the items you need from the borrower. At a minimum, this will include:

• Signed Application and Disclosures
• ID's - Two Forms
• One Government photo ID and a Social Security Card
• If a Social Security Card is not available, have the borrower wet sign an SSA-89 and ask the lender processor to run the Social Security Search to verify the borrower's SSN
• Income Documents, usually:
• Most recent Social Security Award letter and 1099
• Annuity or Pension Award letters and 1099
• Paystubs and W-2s
• Title
• Title Commitment Standard title Items
• Trust—Many Reverse borrowers will put their homes into a Trust. You must obtain this Trust and have it approved by Title and Underwriting. Even if the borrower no longer wants to close in the Trust, you must obtain the trust.
• Title will need to verify the last two years of property taxes were paid on time.
• Lender Title insurance coverage will be finalized when the appraisal is finalized. Note: Coverage will need to be at least as high as the loan's Principal Limit.
• Insurance
• Declarations Page
• The insurance agent will need to verify there have been no late payments on insurance in the last two years.
• Note: Dwelling Coverage will need to cover the Principal Limit
• Mortgage Statement
• It's always good to get the most recent mortgage statement upfront. It helps you order the payoff, and it helps underwriting understand the loan terms.
• FHA Case Number
• For FHA/HECM loans, you must have the FHA Case number to submit your file or order the appraisal. Usually, you will request the Case number from your lender. It takes about 24 hours to come back.

Appraisal

For FHA loans, you need an FHA Case number to order the appraisal.

Some lenders require evidence of your appraisal order for the initial submission; some do not. Notice that this is the order, not the completed appraisal. Some lenders want to know that you have ordered the appraisal before they will underwrite the file.

All lenders will allow you to submit without a completed appraisal. You will receive a suspense condition for the appraisal with the initial approval.

Important note on Appraisals: FHA randomly (or not randomly? We don't know their formula) selects files to require a second appraisal. This is a severe bummer when this happens because you will be notified after the first appraisal is reviewed. There is a disclosure in the application package notifying the borrower this is a possibility.

Here's the bottom line for Pre-Submission on a Reverse Mortgage: Very often, you will have the borrower documents, Title, and signed application but will be waiting for the Counseling Certificate. You cannot get your file into underwriting without the Counseling Certificate (Counseling Certificate). For this reason, we want everything to be ready to go once the Counseling Certificate comes in.

Approved With Conditions

Congratulations! You've done it; you got your first Reverse Mortgage Approval. Here are some conditions you may not be familiar with:

• Refinance Benefit tests: All Reverse Mortgage Refinances must pass benefit tests. Knowing what these are ahead of time could save everyone a lot of time and money.
• Evidence of On-Time Payments
• Reverse mortgage underwriting guidelines require evidence of on-time payments of all housing expenses for the last two years (24 months). These include:
• Taxes
• Insurance
• HOA
• Payoff with HECM Worksheet
• The HECM worksheet shows important loan term information on the current loan. Ensure the loan officer sees this, as it could affect the benefits tests.
• Also, remember that existing reverse loans, with deferred interest and withdrawals, will add to their monthly balance, not subtract from payments.
• Final LESA Determination
• A LESA will be required if your borrowers do not have adequate income to meet residual income requirements. LESA stands for Life Expectancy Set-Aside. This means the borrower can put money aside for future escrows instead of having the expense counted against them when qualifying.
• Appraisal 1004D
• Reverse appraisals are viewed through the FHA lens. Any appraisal conditions that would pop up on a Forward loan will also show here.

Clear to Close

You might be surprised to learn that Reverse Mortgage lenders generate documents immediately after obtaining a clear to close. This is because the final Rate Lock is not approved until the loan is clear-to-close. Because the rate lock is typically based on the rate from the prior Tuesday, Reverse Lenders want to lock and move straight to signing documents. There is still a 3 day right of recission on Reverse Mortgage Refinances.