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Reverse Mortgages and Flood Zones? Will my Property Qualify in a Flood Zone?

HECM Reverse Mortgage

Sep 24

Can I get a reverse mortgage if my home is in a flood zone?

If you own a home that’s at risk of flooding, you will likely have to carry flood insurance to obtain and maintain a reverse mortgage.

The National Flood Insurance Program aims to reduce the impact of flooding on private and public structures by providing and mandating flood insurance for properties deemed at high risk of flooding.

The Flood Disaster Protection Act of 1973 stipulates that mortgage lenders require flood insurance for properties located in Special Flood Hazard Areas (SFHAs). These areas are indicated high risk on Flood Insurance Rate Maps created and maintained by the Federal Emergency Management Agency (FEMA).

Lenders are required to determine if a property is located in a designated SPHA zone before making a loan. If so, the property must be covered by flood insurance during the entire loan term. If you are required to maintain flood insurance, then you must provide your loan servicer with evidence of this coverage and ensure that this policy is renewed upon expiration.

In the case of reverse mortgages, not maintaining flood insurance on a property located in a designated flood zone can lead to a default on the loan and immediate repayment owed. All reverse mortgages require the homeowner to stay current on property taxes, homeowners insurance, and utilities, as well as maintain the property to proper standards or risk default.

Keep in mind that even if you were not required to buy flood insurance when you originally bought your home, you could be required to buy flood insurance when you obtain a reverse mortgage. It’s also possible to be ordered to purchase flood insurance after getting a reverse mortgage even if you weren’t required to at closing.

That’s because FEMA constantly updates its flood zone designations, especially when there is new development in an area, updated flood data, or completed flood-zone projects. A property that was in a moderate risk area may be redesignated as being in an SFHA if FEMA determines it is at greater risk of flooding.

Conversely, if your home used to be in a high-risk area and is now at moderate to low risk due to better flood protections, you can cancel your flood insurance.

Your reverse mortgage lender may require a set-aside for your flood insurance premium. Set-asides in a reverse mortgage are similar to escrow accounts on a normal mortgage. They hold funds needed to pay for costs beyond the principal and interest of the loan. In the instance of a set-aside, the sum required to fund the account is deducted from the primary limit on your reverse mortgage.

For example, assume a homeowner could receive a maximum of $150,000 from a reverse mortgage based on their age and home equity, without a set-aside. But income and the debtor’s credit raises the chance he or she may have problem paying taxes and insurance, so the lender imposes a $30, 000 set aside to cover those costs over the life of the loan. That means the borrower is only going to receive $120,000 maximum from the reverse mortgage, but the loan sum will still be $150,000.

Set aside sums are based on the present and future projected costs of the item(s) the account will be paying (e.g. your present and planned property tax obligations), and how long the lender will pay the expense. If the set aside is created for the life of the reverse mortgage, the lender will use your age and life expectancy to determine the amount to set aside.

While set-asides are sometimes compulsory based on your own credit and income, you may also establish them voluntarily if you want to ensure that your taxes and insurance are paid. When you create a set-aside, the lender is accountable for paying those prices, just like they’re when you create an escrow account on a conventional mortgage.