UPDATE: FHA Extends Foreclosure Protections to Maui Borrowers
The Federal Housing Administration extended its existing disaster-related foreclosure moratorium in Maui County, HI, through May 6, 2024, for borrowers with FHA-insured single-family mortgages, including HECMs. This extension provides additional time for borrowers in the process of recovering from the catastrophic Maui wildfires to consult with mortgage servicers and housing counselors and to access federal, state, and local housing resources without also having to contend with the burden of an impending foreclosure action.
I live in California, have a reverse mortgage, and would like to know what would happen if my home were to burn down in a fire? Do my monthly payments or line of credit continue if I must rebuild? Does the loan become due if my insurance does not cover my loss?
Insurance coverage works the same on a reverse mortgage as on a forward loan. All hazard claims are paid jointly by the owner and anyone listed as “additional insured” (the lender) until the repairs are completed. After completing inspections, the lender will sign off on the checks to ensure the home has been rebuilt.
In the case of properties that are so severely damaged that they need to be replaced in multiple draws, the lender will work with a draw schedule with the company doing the repairs so that money is released on a draw schedule as needed.
In this manner, if the contractor or the borrower does not complete the repairs, the lender can use the insurance proceeds to rebuild/repair the structure by the terms of the Deed of Trust.
The loan call provisions are defined in the docs. The borrower must reasonably maintain the home, which means that if the improvements are destroyed and not rebuilt, the borrower has not met the loan requirements.
In that case, the lender would keep the insurance proceeds and be forced to accelerate the loan (call it due and payable) if the proceeds were insufficient to repay the loan and the borrower fully was unwilling/unable to rebuild. They obviously could not keep the loan outstanding on a piece of land where a house once burned to the ground.
Interruption of HECM Proceeds
I think the decision to interrupt monthly payments would depend on the degree of damage. The borrowers must live in the home to continue receiving the payments. The payments would continue if there was repairable damage and they still occupied a habitable home.
If the home was destroyed and the borrowers were forced to vacate the property, the lender would not continue to forward funds on a non-existent or inhabitable home.
I have never asked servicers this question about a home destroyed by fire. Still, I did have occasion to ask CELINK about a home affected by a sinkhole in Florida several years back, and this was the answer I received because those borrowers were also concerned about whether or not they would ever be able to rebuild based on the sink hole and the instability of the soil.
If you are concerned that you might not have adequate insurance, it would be wise to look into guaranteed replacement coverage so you are covered no matter what the cost to rebuild comes to. That would certainly be up to you and your insurance agent.
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