Flood Certification and Hazard Insurance Requirements
Key Takeaways
- You must maintain a comprehensive homeowners insurance policy at all times.
- If your home is in a FEMA flood zone, you must purchase expensive federal flood insurance.
- Failure to maintain these policies will result in immediate foreclosure.
When you take out a reverse mortgage, you retain the title to your home. However, the Federal Housing Administration (FHA) and your lender hold a massive lien against the property.
Because the house is the sole collateral guaranteeing the loan, the FHA demands absolute assurance that the house will not be destroyed by a disaster, leaving the bank with a worthless piece of land.
This requires two strict insurance protocols: Hazard Insurance and Flood Certification.
The Hazard Insurance Requirement
You are required to maintain a comprehensive Homeowners Insurance (Hazard Insurance) policy for the entire life of the reverse mortgage.
The policy must cover the replacement cost of the physical structure. At closing, the lender will require you to provide a "declaration page" from your insurance agent proving that the policy is active and that the premium is paid for the next 12 months.
If you ever let this policy lapse because you forgot to pay the bill, the lender will instantly implement "Forced Placed Insurance"βan incredibly expensive policy they buy on your behalf and charge to your loan balance. If you refuse to insure the home, they will foreclose.
The Flood Certification
During the underwriting process, you will be charged a tiny fee (usually $15 to $20) for a Flood Certification.
The lender hires a third-party company to check your exact property address against the latest FEMA flood maps. - If your home is in a designated "Zone X" (low risk), you are fine. - If your home is located in a Special Flood Hazard Area (SFHA), usually designated as Zone A or Zone V, you are legally required to purchase National Flood Insurance.
Federal flood insurance is notoriously expensive, often costing thousands of dollars a year. Standard homeowners insurance does not cover flood damage. If the Flood Certification flags your property, you cannot get the reverse mortgage until you provide proof that you have purchased a flood policy.
Furthermore, you must pass the Financial Assessment proving you have enough ongoing income to afford that massive flood insurance premium every year for the rest of your life.