Reverse mortgages and homeowners insurance: what you must keep in force

A reverse mortgage does not change how a homeowners policy works, but it turns the policy into a condition of the loan. On an FHA-insured Home Equity Conversion Mortgage (HECM), which the CFPB calls the most common type of reverse mortgage, you must insure every improvement on the property against the hazards the lender requires, keep the policy paid, and pay property taxes and any association dues. If the property charges go unpaid and the lender cannot cover them from your loan funds, the whole balance can come due (HUD regulation, 24 CFR 206.27). The rules below describe HECMs; a proprietary (private) reverse mortgage is governed by its own loan documents, which usually contain similar insurance covenants.

What the loan documents say about insurance

HUD's regulation for HECMs requires the borrower to insure all improvements, existing or built later, "against any hazards, casualties, and contingencies, including but not limited to fire and flood, for which the mortgagee requires insurance." The coverage must be kept in the amount and for the period needed to protect the lender's investment. Whatever the lender requires, the borrower must at least carry flood insurance to the extent HUD requires (24 CFR 206.27(b)(2)).

HUD's model HECM security instrument, last revised October 31, 2023, fills in the practical terms (HUD model HECM ARM mortgage). The lender may increase or decrease the required amount, as long as it stays at or above HUD's minimum. Policies must be with companies the lender approves, must carry a loss payable clause in the lender's favor, and the lender may hold the policies and renewals. Your insurer will therefore list the servicer as the mortgagee on the declarations page, using the mortgagee clause the servicer gives you. Check your own loan agreement, because documents differ by lender and by when the loan was made.

Two things are easy to confuse with homeowners insurance. The FHA mortgage insurance premium on a HECM protects the lender and the program, and can be added to the loan balance (24 CFR 206.27(b)(7)); it covers nothing on your house. See homeowners insurance vs mortgage insurance: who each one protects. And the reverse mortgage has no escrow account in the usual sense, which brings up the payment question.

Who pays the premium: three ways

HUD's property-charge rule lists the obligations: property taxes and special assessments, hazard insurance premiums, any flood insurance premium, and the borrower's ground rent, condominium, planned unit development and homeowners' association fees (24 CFR 206.205). How they get paid depends on a financial assessment at origination and a choice you make at closing.

According to the regulation, a LESA can be required based on the financial assessment, and an election to have a LESA or to have the servicer pay at closing cannot later be cancelled (24 CFR 206.205(b)). If the set-aside runs out, or the loan funds are used up, you must pay the charges yourself even if you had elected for the servicer to pay them.

When premiums rise: a hypothetical

Say your homeowners premium is $2,400 a year when you close a HECM, and at a later renewal it becomes $4,200. If you pay directly, you need another $1,800 a year. If you have a LESA, the $1,800 comes out of money reserved against your projected costs, so the reserve may run dry years earlier than the original projection assumed. The servicer must run an annual LESA analysis, and where funds are exhausted or insufficient it must tell you in writing within 15 calendar days that you now owe the property charges (24 CFR 206.205(c)(3)).

If you then miss a payment, the regulation's sequence depends on the funds left. Where principal limit remains, the servicer pays the charge and adds it to your account, reducing your available loan funds. It must notify you in writing within 30 days of learning the charge is outstanding, and you have 30 days to explain. Where no principal limit remains and the charges still go unpaid, the mortgage can be called due and payable, a step that requires HUD's approval. A rising premium is therefore a loan-balance and cash-flow question as well as an insurance one. Run a renewal through the home insurance renewal increase checker and read your home insurance premium jumped: what to do before accepting a jump.

If your policy lapses or is nonrenewed

A lapse invites lender-placed insurance. HUD's model security instrument lets the lender "do and pay whatever is necessary to protect the value of the Property," including paying hazard insurance, if you fail to meet your covenants. Force-placed insurance protects the lender's interest, can cost much more than a policy you buy, and covers less.

The servicer has to follow notice rules before billing you. The CFPB's Regulation X exempts reverse mortgage servicers from sections 1024.38 through 1024.41, but not from section 1024.37 on force-placed insurance (12 CFR 1024.30). Under that section, a servicer needs a reasonable basis to believe you failed to keep coverage, must send a notice at least 45 days before charging you, must send a reminder, and must explain that the insurance it buys may cost significantly more and provide less coverage (12 CFR 1024.37). Evidence that you had continuous coverage ends the charge.

If your insurer sends a nonrenewal notice, move early:

1. Ask your agent why, and whether it can be cured (a roof repair, a removed tree). See your home insurance was nonrenewed: what to do now.
2. Get quotes from other insurers before the old policy ends. Tell each that a HECM lender will be the mortgagee and ask about their roof and age-of-home rules.
3. If the private market declines you, ask about your state's FAIR plan or wind pool; FAIR plans explained: the insurer of last resort for homes covers how they work.
4. Send the new declarations page and the mortgagee information to the servicer before the old policy ends, not after.
5. Keep the proof of continuous coverage, since evidence of it is what ends a lender-placed charge.

What happens when you have a claim

The model security instrument tells you to give the lender immediate notice by mail, allows the lender to make proof of loss if you do not, and directs the insurer to pay the lender instead of the lender and borrower jointly. Insurance proceeds are applied to restoration or repair of the property if that is economically feasible and the lender's security is not lessened. If not, they go to the debt, and any excess goes to whoever is legally entitled to it. In practice, ask the servicer for its loss-draft process on the day you report the claim, because the lender may release repair money in stages. why your mortgage company is on the claim check explains how lenders handle claim checks on ordinary mortgages. The added point on a reverse mortgage is that proceeds not used for repairs can be applied to the debt rather than come back to you.

Reporting the claim to your insurer follows the usual steps in how to file a homeowners insurance claim.

Occupancy, absences and the insurance clock

A HECM must remain your principal residence. With HUD's approval, the loan can be called due and payable if the property stops being the principal residence of every borrower for reasons other than death, or if a borrower is away for more than 12 consecutive months because of physical or mental illness and no other borrower lives there (24 CFR 206.27(c)(2)). The insurance clock is much shorter. Many homeowners policies restrict coverage after 30 or 60 days of vacancy, and a move to assisted living can cause trouble well before the loan question arises. Tell both the servicer and the insurer if a stay becomes extended, and read vacancy and unoccupancy exclusions. When the last borrower dies, the loan becomes due and payable unless another borrower lives there or a deferral applies to an eligible non-borrowing spouse; the home still needs a policy during that period, and home insurance after a death in the family and insuring an inherited house: what to do in the first 30 days cover what the family should do.

Keeping the cost down without breaking the loan

You can shop at renewal, and you choose the insurer subject to the lender's approval. Ask about discounts for age, claims history, a newer roof and protective devices (retiree, employer and affinity group discounts, home insurance for seniors and retirees). Be careful with the cuts that save money on paper: a lower dwelling limit or a much higher deductible can put you under the lender's minimum or leave you with a repair bill you cannot pay. cutting coverage to save money: the cuts that backfire lists the usual ones. Ask the servicer for its written insurance requirements before you change anything.

If you can't afford the premium

Move before you miss a payment. The CFPB says failure to pay property taxes or homeowners insurance on a reverse mortgage may lead to foreclosure and advises borrowers to get help as soon as they expect trouble. It points to Area Agencies on Aging, reachable through the Eldercare Locator at 800-677-1116, and to a HUD-approved housing counselor (CFPB). Counselors can look at your loan type, the set-aside and local programs. Your state insurance department can explain your policy and complaint rights.

Key takeaways

• On a HECM, homeowners insurance is a loan condition: all improvements insured against the hazards the lender requires, the lender named as mortgagee, and the premium paid on time.
• Property charges are paid by you, from a life expectancy set-aside, or by the servicer from loan funds, and the choice you make at closing may not be reversible.
• A premium increase can drain the set-aside early, and unpaid charges the loan cannot cover can make the loan due and payable.
• A lapse can trigger lender-placed coverage; the servicer must give notice at least 45 days before charging, and proof of continuous coverage stops the charge.
• Claim money goes to the servicer first and is used for repairs or to reduce the debt, so ask about the draw schedule when you report a loss.