ADU burned down and was a total loss

[Denzel Faulken]

So I have a question, I have a property that has a main dwelling and that has a carriage house (ADU) in the back it was my first property ever bought I was severely underinsured on the carriage house. Last month my neighbors garage caught fire and turned the the carriage house into a total loss. Now my lender are debating if I have to rebuild the structure completely with the insurance money. I thought if something was a total loss I could do something else what the funds at this point I was going to do a garage or a garage/loft. Has anyone dealt with a total loss before and had a mortgage on the property ? And if so what was your result?

[Greg Scott]

I'm surprised a lender on a residential property would be this involved.  Is this a FNMA loan or a bank loan?

I could see the bank wanting the ADU back if they feel the ADU was supporting the appraisal. If you feel the LTV is below 75%, I suspect an as-is appraisal might satisfy them, but you would probably have to pay for that to get done.

[Denzel Faulken]

Hey Greg,

It’s a regular FNMA loan fha. If the home was a single family their interest would still be protected values in the areas are up. I am surprised as well.

[John Mocker]

Denzel,

I suspect that the discussion is related to the the Insurance Policy provisions.  Normally, if the policy values the loss on Replacement Cost, they will initially pay the loss at the Depreciated value, once the damaged area is rebuilt, then they pay the additional amount (up to the limit on the policy).   

For example, if your ADU had a Replacement (rebuilding cost) of $100,000 and was 30% depreciated and was totally destroyed. The company would pay up to $70,000 on the loss. Once you rebuilt the ADU, you would be paid the remaining $30,000