Insurance on a Home With a Reverse Mortgage: Who Pays?

Many Americans age 62 or older opt for a reverse mortgage for extra help financially during retirement. A reverse mortgage is a type of loan that turns home equity into cash. With a reverse mortgage, the lender makes payments to the borrower. The loan is repaid when the borrower moves out of the home or passes away, typically through the sale of the home.

Home equity conversion mortgages (HECMs) are the most common type of reverse mortgage, and they require three things from the homeowner in order to avoid foreclosure. First, the home must remain the primary residence. Second, the home must be kept in good repair. Lastly, the homeowner is responsible to keep and pay for a homeowners insurance policy and to pay annual property taxes as well.

In short, if you take out a reverse mortgage, you would have to take care of the house and take precautions by having home insurance, in case it ever needs rebuilding. Even condominiums are eligible for reverse mortgages, and while condos require less coverage than a house, it’s advised that you carry a policy, even if it’s not required. See more on all these points below.

On This Page

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  Why Do I Need Home Insurance on a Home With a Reverse Mortgage?

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  How Much Insurance Am I Required to Have on a Home with an HECM?

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  What Happens if I Don’t Have a Home Insurance Policy?

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  Why Should I Carry Condo Insurance With a Reverse Mortgage When It’s Not Required?

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  The Pros and Cons of a Reverse Mortgage Loan

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  Reverse Mortgage and Insurance FAQs

Why Do I Need Home Insurance on a Home With a Reverse Mortgage?

You need home insurance on a home with a reverse mortgage for several reasons. These are the top reasons:

• Lender Requirement: In nearly all cases, home lenders require homeowners to maintain home insurance as a condition of the reverse mortgage.
• Personal Property Protection: Home insurance protects your property and belongings from damage or loss due to hazards like fire, theft and natural disasters.
• Personal Liability Coverage: Home insurance provides liability coverage in case someone is injured on your property and you are found legally responsible.
• Home Equity Protection: Home insurance can help protect your home's equity by ensuring you have the means to repair or rebuild it after extensive damage.

It's important to review your policy to ensure you have adequate coverage for your home, belongings, and personal liability. Each lender will have specific requirements, which means that you will likely need to buy an HO-3 policy, which is what most American homeowners have.

If you live in a condo and home insurance is not required, it’s a good idea to buy it anyway to protect your belongings and any upgrades, such as new flooring, in case another unit has an accident that affects your home or if you have a sudden burst pipe or water heater leak. See more on this below.

How Much Insurance Am I Required to Have on a Home with an HECM?

The specific insurance requirements can vary based on the lender and the terms of your reverse mortgage agreement. It's important to review your loan documents and consult with your lender or a financial advisor to understand the exact insurance requirements for your HECM. Also consider what your valuables and basics would cost to replace.

What Happens if I Don’t Have a Home Insurance Policy?

If you go long enough without a home insurance policy, your home may go into foreclosure. If you do not have a home insurance policy with a Home Equity Conversion Mortgage (HECM), the lender may consider it a breach of the loan agreement.

Here are the steps lenders take when you are uninsured:

1. Notice of Non-Compliance: The lender may send you a notice informing you that you are in breach of the loan agreement due to the lack of insurance coverage.
2. Requirement to Obtain Insurance: You may be required to buy a home insurance policy that meets the lender's requirements. The lender may specify a deadline by which you must buy the required coverage.
3. Force-Placed Insurance: If you fail to buy insurance by the deadline, the lender may purchase insurance on your behalf. This insurance, known as lender-placed insurance, is typically more expensive and provides limited coverage compared to a standard homeowners insurance policy. You will be responsible for the cost of this insurance coverage, which may be added to your loan balance.
4. Risk of Foreclosure: Failure to maintain insurance coverage could be considered a default under the loan agreement, which may ultimately lead to foreclosure.

It's important to maintain adequate insurance coverage on your property to protect yourself and comply with the terms of your HECM loan agreement.

Why Should I Carry Condo Insurance With a Reverse Mortgage When It’s Not Required?

Carrying condo insurance with a reverse mortgage, even when it's not required, is a wise decision for several reasons:

• Personal Property Protection: Condo insurance covers your personal belongings in case of theft, fire, or other covered perils.
• Personal Liability Coverage: It provides liability coverage in case someone is injured in your condo and you are found legally responsible. Pet bites are also covered.
• Building Coverage: While the condo association typically has a master insurance policy, it may not cover everything. Your condo insurance can cover improvements you've made to your unit and personal property, such as tiles and flooring.
• Loss Assessment Coverage: In some cases, if there is damage to the condo building that exceeds the master policy's coverage, the condo association may assess unit owners for the remaining amount. Your condo insurance may cover this assessment.

While condo insurance may not be required, it can provide valuable protection, peace of mind and financial security.

The Pros and Cons of a Reverse Mortgage Loan