If a borrower has sustained damage to their HECM property from a disaster event within a Presidentially Declared Major Disaster Area (PDMDA), what amount must the borrower -whose loan is in a Due and Payable status - repay to satisfy the HECM loan if the borrower does not wish to rebuild or repair the damaged property?

Insurance proceeds the servicer and/or the borrower receives must be applied to the HECM loan balance.  The borrower may then sell the property for at least the lesser of the mortgage balance or 95% of the current “as-is” appraised value of the property.  Any excess insurance proceeds over an amount required to repay all outstanding HECM loan indebtedness should be returned to the borrower or other authorized party. 
Note: The model mortgage documents require that insurance proceeds be applied to the 2nd mortgage first, then to the 1st mortgage.

Any questions may be directed to the FHA Resource Center at Toll-Free Telephone Number (800) CALLFHA (225-5342) or by email to answers@hud.gov .   Persons with hearing or speech impairments may reach this number by calling the Federal Relay Service at (800) 877-8339.

HQ Policy Determination

All policy information contained in this knowledge base article is based upon the referenced HUD policy document. Any lending or insuring decisions should adhere to the specific information contained in that underlying policy document.

Topic Number: KA-01549