An origination fee is commonly charged by HECM reverse mortgage lenders to cover expenses associated with originating reverse mortgages. Such expenses include underwriting, loan processing, document preparation, funding, etc.
Most HECM reverse mortgages are “refinances”, meaning they’re originated on homes already owned by the applicants. In such cases, the origination fee is typically not paid out of pocket. Most lenders will allow the origination fee to be rolled into the starting loan amount.
If you’re purchasing a home with a HECM (yes, this is possible!), the origination fee is paid out of pocket as part of your down payment.
How much is the origination fee?
Note that lenders don’t always charge origination fees. However, if they do, they’re subject to strict regulation. By law, the most a lender can charge is 2% of the first $200,000 worth of the maximum claim amount, plus 1% of the maximum claim amount over $200,000.
The most a lender can charge, regardless of maximum claim amount, is $6,000.
For example, if the maximum claim amount is $200,000, the most the lender can charge is $4,000, or 2% of the first $200,000 worth of maximum claim amount. If the maximum claim amount is $300,000, the most the lender can charge is $5,000. Again, the lender can charge up to 2% of the first $200,000 worth of maximum claim amount (which equals $4,000) plus another 1% of the maximum claim amount over $200,000 (which equals another $1,000).
Origination fees are often negotiable
Because origination fees are charged by the lender (as opposed to a third party, like appraisers, title companies, etc.), you may have some room for negotiation. Keep in mind that lenders make money off of the initial loan amount. Larger loans generate more interest and more profit for the lender. If your starting reverse mortgage balance is relatively large (such as when you’re paying off an existing mortgage), the lender will make more money on interest and likely have more leeway to discount the origination fee.
On the other hand, if your home is free and clear (or very nearly so) and your starting loan balance is relatively low, the lender will make relatively little interest. The lender will likely have less room to discount.
If you’re successful at negotiating down the origination fee, you’ll receive the discount in the form of a lender credit. Lenders don’t cut or eliminate fees, they instead offset them with a lender credit, which is essentially a payment to you at closing to cover closing costs (such as the origination fee).
If you would like to get a discount on your origination fee, be sure to ask! Lenders want your business and the worst they’ll say is no, right?