Do Reverse Mortgages and Disasters Mix?

What happens to a reverse mortgage when disaster strikes?

2017 had a number of fires in the West and Hurricanes in the South. Other devastating natural disasters like tornados, floods and earthquakes happen too.

Disasters don’t need to be widespread to affect your home – you could easily suffer loss on just your home without homes of others being affected as they are with broader natural disasters.

Many people might wonder “What happens to my reverse mortgage in the event my home has been badly damaged or destroyed?”

You will be glad to learn that an insurance claim does NOT impact the terms of a reverse mortgage loan, even if the home is completely destroyed. This means that borrowers can continue to collect payments, or build deferred payments with their line of credit from their reverse mortgage, as long as they plan to rebuild the house. And this is where having proper and complete homeowner’s insurance for loss is important.

Insurance proceeds shall be applied to restoration or repair of the damaged property, if the restoration or repair is economically feasible and lender’s security is not lessened. Any excess insurance proceeds over an amount required to pay all outstanding indebtedness shall be paid to the “entity legally entitled thereto,” presumably the owner, or heirs should you have perished regardless of reason.

It is most likely that the time it takes to rebuild and occupy will be longer than one year. Payments continue since the property is still the primary residence while under re-construction even though the borrower cannot occupy the home. You would just need to keep the construction moving and state the reason displaced on the annual primary residence notice.

Payments are only stopped when the loan is in a called due status for default reasons as provided in the mortgage. However, if you don’t pay off the loan, or rebuild, then the loan would be due and payable at some point. This would be the case if you decide NOT to rebuild or replace the home, since it would not be your primary residence anymore.

You might be wondering; HOW can this be possible? It’s hard to imagine being able to borrow money against a home that is uninhabitable. Well, this is what the Mortgage Insurance Premium (MIP) covers. The MIP enables the borrower to maintain the status of their home as their primary residence, despite living elsewhere while they rebuild. If you decide not to retain the lost home as your primary residence, then the repayment process begins. However, the MIP you were paying means you won’t owe more than what the property can be sold for.

Reverse Mortgages help in many situations. Damage or loss might happen. But, rest assured that if you follow the rules and bring the property back to standards (for eventual resale), you can continue to count on the reverse mortgage to do what it is supposed to do in your plan (e.g., supplement income tax free, standby money for long term care expenses, replace lost income for a survivor, etc.).

I am grateful to Hank Rhodes, of Reverse Mortgage Funding LLC, for his detailed assistance on this relevant topic of home loss when holding a reverse mortgage.

Please see these posts about reverse mortgages in general.

Reference: Section 1-13 RECOVERY OF MORTGAGE PROCEEDS and other sections of this detailed and technical handbook on reverse mortgages.

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