Key Takeaways
- Lenders require a flood certification to determine if your home is in a high-risk flood zone.
- You must maintain adequate hazard (homeowners) insurance for the life of the loan.
- Failure to maintain insurance can lead to forced-placed insurance or foreclosure.
\n\nAmong the minor closing costs on your reverse mortgage estimate, you will likely see a small charge (usually under $20) for a "Flood Certification." While inexpensive, this certification triggers one of the most critical ongoing requirements of your reverse mortgage: maintaining adequate property insurance.
The Flood Certification
Before approving your loan, the lender will hire a third-party company to pull FEMA flood maps and determine exactly where your property lies. This is the Flood Certification.
- If you are not in a Special Flood Hazard Area (SFHA): You are not required by law to carry flood insurance (though it is often still a good idea).
- If you are in an SFHA: Federal law dictates that you must obtain and maintain a separate flood insurance policy for the life of the loan. The coverage must equal the replacement cost of the property or the maximum limit offered by the National Flood Insurance Program (NFIP), whichever is less.
The Hazard Insurance Requirement
Whether you are in a flood zone or not, you are absolutely required to maintain standard hazard insurance (your everyday homeowners insurance policy).
Because the lender is handing you a large sum of money secured only by the house, they need an absolute guarantee that if the house burns down, their collateral is protected. The FHA requires that your insurance coverage equal at least 100% of the replacement cost of the property.
The Danger of Lapsing Insurance
Maintaining your homeowners insurance is not just a suggestion; it is a primary covenant of the reverse mortgage contract.
If you fail to pay your insurance premiums and the policy lapses, the lender will receive a notice from the insurance company. The lender will then take drastic action to protect their asset:
- Forced-Placed Insurance: The lender will buy a new insurance policy for the home on your behalf and add the cost to your loan balance. Forced-placed insurance is notoriously expensive (often double or triple standard market rates) and only protects the lender's interest, not your personal belongings.
- Default and Foreclosure: If you refuse to reinstate your own insurance policy, the lender can declare the loan in default for failing to meet the terms of the agreement. This can trigger the loan becoming due and payable, ultimately leading to foreclosure.
When you take out a reverse mortgage, you must budget to pay your property taxes and homeowners insurance every single year without fail.\n