Just like a traditional loan, insurance also covers a reverse mortgage loan. For reverse mortgage loans, all hazard claims are paid jointly by the owner and the lender until the house is fixed.
When the lender has completed inspections to ensure the home has been rebuilt, at that point, they will sign off on the checks.
However, in a situation where the property is destroyed, such that it needs to be replaced in multiple draws, the lender will work with a draw schedule with the repair company so that money is released on a draw schedule as needed.
But, if the repair company or the borrower does not complete the repairs, the lender can use the insurance proceeds to rebuild/repair the structure. This is under the terms of the Deed of Trust.
In the documents provided by the lender, the loan call provisions are stated clearly. As a borrower, you must maintain the home (that is, you must live in the house), which means that if the home is destroyed in any way, and not rebuilt, you have not met the requirements of the loan.
In such a situation, the lender would keep the insurance proceeds and can decide to accelerate the loan — which means they can call it due and payable.
Will My HECM proceeds be Interrupted?
In most cases, it may take longer than one year to rebuild and occupy the home. Payments will continue because the property is still the primary residence even while under re-construction. However, you have to keep the construction going and state the reason for displacement in the annual primary residence notice.
Payments may stop when the loan is in a called due status for default reasons as provided in the mortgage. If you don’t pay off the loan, or rebuild, then the loan would be due and payable eventually — since the house would not be your primary residence anymore.
If you aren’t sure about having adequate insurance, it would be wise for you to look into guaranteed replacement coverage, so you are covered no matter the cost to rebuild.