Tom MacDonald - Reverse Mortgage Consultant

     

 

 

 

 

       Reverse Mortgage Consultant

      Tom MacDonald

 

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Homeowner's Insurance When Doing a Reverse Mortgage

This is sometimes referred to as hazard insurance or fire insurance. 

On any home with a mortgage, the lender will require homeowner's insurance.  This is the same for a reverse mortgage.  The lender wants the collateral for their loan to be protected incase of some accident (such as fire).  Typically, they will want replacement value.  If the house should burn down, the insurance must cover the cost of tearing down the burnt home, clearing the property and rebuilding the home to a similar size and value as the initial home.  Since much of the appraised value is in the land, the insurance usually doesn't need to be as much as the appraised value.   Depending on the part of the country you are in, the land value could be more than half the total value or significantly less than half.  If, for instance, a home valued at $300,000 was insured for $180,000 with replacement value by the insurance company, that would be acceptable.

Most homeowners insurance policies automatically provide “replacement cost” coverage for damage to the structure. A replacement cost policy pays for the repair or replacement of damaged property with new materials of similar kind and quality. There is no deduction for depreciation; that is, the decrease in value due to age, wear and tear, and other factors.   The loan documents require the borrower to provide insurance in an amount equal to 100% of the insurable value of the improvements on the property, commonly called the “replacement cost” of the improvements.

Many policies will word the replacement coverage with words such as Dwelling Replacement Construction, Replacement Cost Coverage, Extended Replacement Cost Included or similar.  A number of companies won't use words that give you a clue but one of their codes may cover it.  As an example, It may be coded as HO3.  For some companies, that is their policy for replacement coverage.  If you aren't sure, call your insurance agent. 

A condominium is part of a complex that is insured by the Home Owner's Association.  The owner of a condo only owns the inside (frequently referred to as 'the air') of their unit plus a share (a percentage) of the total complex.  It is the HOA's Master Policy that is relied on by the lender rather than any insurance the owner has on the condo which is typically liability insurance as well as insuring the furniture and other possessions within the condo unit, providing living expenses and such.

The lender will usually ask for a copy of the Insurance Declaration Page at time of application from either the borrower or their insurance company.  This is the cover sheet on the renewal that identifies the insurance company, policy number, agent name, coverage, cost, renewal period and other summary details.

It is extremely important for the borrower to stay current with their homeowner's insurance.  If they don't keep it current, the lender may pay it out of the money still available in the reverse mortgage.  If there is no money available and the borrower will not or cannot bring it current, the loan may be declared due and payable.

You may also sign up for an impound account so your homeowner's insurance is paid by the lender.  The lender will usually hold three years of estimated insurance payments from the original proceeds.  At the end of three years, they will need to do it again.

Flood Insurance

If the home is in a flood zone, flood insurance will also be required.  In some cases, the home has no prior mortgage and the home owner has elected to forego flood insurance.  Whenever there is a mortgage, the lender will require flood insurance.  The flood insurance should be for the same amount as the homeowner's insurance.  The exception to this is when the homeowner's insurance exceeds $250,000 (the maximum for flood insurance). 

An odd situation I ran into a few years ago is that a manufactured home in a flood zone is automatically declined for a HECM Reverse Mortgage.  With or without flood insurance.  It just isn't allowed for a manufactured home to be in a flood zone.  Maybe they are concerned it will become a house boat?

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