Approval Calculations
Unlike a regular mortgage, income and credit scores have no impact on calculating the approval amounts. Three factors determine your gross approval amount:
- Age: The older you are, the more you get!
- Home Value: The more your home is worth, the more you get! FHA imposes a $625,500 cap on this aspect of the calculation, however, so if your home is worth $1,000,000, we will use $625,500 to calculate your approval.
- Interest Rate: The lower the rate, the more you get! There is a bit of a quirk in this part of the calculation. If the expected interest rate is below 5%, we'll use 5% to calculate your approval amount. See my glossary for the definition of an "expected" rate.
From the gross approval amount, we subtract certain fees to arrive at the net approval amount. Most of these fees are paid by the escrow company on your behalf when the reverse mortgage is funded, rather than you having to pay them out of pocket.
- FHA Insurance Premium: Just like an old fashioned 30 year fixed rate mortgage insured by FHA, there is an upfront insurance premium for reverse mortgages. On 30 year mortgages, FHA charges about 2.25% of the loan amount. For Standard reverse mortgages, the charge is 2% of the home value, with a cap of $12,510. For the new Saver reverse mortgage, the fee is nominal (less than $100). There are important benefits to the homeowner for this insurance; just click here for a description of those benefits.
- Miscellaneous Closing Costs: Anytime you buy a home or get a new mortgage, there are a variety of fees that must be paid; such as appraisal, escrow and notary services, title insurance, etc. The total is usually between $2,000 and $3,000 in total.
- Origination Fee: This pays for putting the reverse mortgage together. FHA sets a cap on this fee, and that cap adjusts up or down, depending on the appraised value of the home. The absolute maximum is $6,000. Anything below $6,000 is negotiable.