With natural disasters and homeowners insurance costs making headlines, many homeowners may find themselves dwelling on “what-ifs.” In at least one area, turning that anxiety into action could help ease some concerns.
Too often, those facing an unimaginable loss aren’t aware of how insurance payouts work with mortgaged homes — or that they’ll need to work with their mortgage company as well as their insurer.
“When you have a family that’s just lost everything, they don’t have the mental capacity to take that on,” says Brittnie Panetta, a personal injury lawyer with Matthews & Associates who has worked with California wildfire victims. “You’re just trying to get back on your feet.”
Understanding this process before you ever need to can prevent adding stress to an already difficult situation. Here’s what happens to your mortgage if your home is destroyed, how you might have to work with your mortgage company, and the steps you can take now to ensure you’ll have the resources you need in the event of a disaster.
First steps
Even if your home is a total loss, “the mortgage still lives on, unfortunately,” Panetta says — and you’re still expected to pay it. That’s why, in the wake of a devastating event, one of the first calls you should make is to your mortgage servicer. The servicer is the company you make payments to, whether it’s your original lender or a different firm.
If you need the money you would have spent paying your mortgage to cover other immediate costs, you’ll want to ask about forbearance. A mortgage forbearance temporarily puts your loan on hold, allowing you to skip payments without facing late fees or damage to your credit score. Forbearance is temporary, and it’s not forgiveness — you’ll have to make up the missed payments. But the short-term relief it provides could be invaluable.
Even if you can continue making payments, you need to inform your servicer about what happened. In fact, most home loan documents require you to inform the lender or servicer. That’s because the company that holds your mortgage has a claim on your home. That relationship can influence what comes next.
Rebuild or pay off
Homeowners faced with a total loss have to make a difficult choice: Whether to use their insurance money to rebuild or pay off the mortgage.
“It’s really tough,” says Jennifer Beeston, a branch manager and senior vice president at Rate who worked with Tubbs and Camp wildfire victims in California. “This is a horrible, emotional time. But unfortunately, it’s also one of those times where really understanding the math, looking at your options, weighing pros and cons… is critical.”
Mortgage documents are often filled with complicated language about insurance and rebuilding, but it generally boils down to a few key points. As noted above, the lender must be notified of the loss. Later, the homeowner and lender have to agree on whether the insurance payout will go toward paying off the mortgage or rebuilding. If the homeowner chooses to rebuild, the rebuilt home needs to be comparable in value to the one that was destroyed — and the lender manages paying out the insurance money.
For many homeowners, signing over the insurance check to their mortgage servicer is an unpleasant surprise.
“That was one of the things that people were really angry about,” Beeston recalls of the Tubbs fire. “Because they don’t want someone controlling their money, which I understand, but that is standard across the industry.”
During the rebuilding process, the homeowner continues making mortgage payments. That can mean paying a mortgage for a home that’s unlivable while paying for other accommodations. Loss of use coverage, which is a standard part of most homeowners insurance policies, can help defray those costs; FEMA housing assistance may also help with this expense.
A homeowner who can’t afford to — or doesn’t want to — rebuild would need to use their claim funds to pay off the destroyed property’s mortgage in full. It’s important to know that insurance policies may pay out smaller settlements for mortgage payoff than for rebuilding.
“It’s becoming a less desirable option to just pay off the mortgage with these prices,” Panetta, the personal injury lawyer, says. “Your policy may say you’re insured for $500,000 if you want a payout, but up to a million if you want to rebuild. It’s a huge discrepancy in value.”
Planning ahead
While you can’t control when disaster strikes, you can put yourself in a better position to face it. There are a couple of key preparation steps you can take now.
Make sure you can easily access key information about your mortgage, like your loan details and the servicer’s contact information. In the past, that might have meant keeping these documents in a fireproof safe, but today, storing them in the cloud or a secure app is probably more handy.
Additionally, keep documentation of your budget or regular expenses. These figures may be needed if you have to file a loss of use claim, since that’s calculated relative to your normal expenses.
The second — and admittedly much more difficult — step is to reevaluate your homeowners insurance. If you have a mortgage, you’re generally required to have homeowners insurance. But you want to be sure your coverage would be enough to rebuild at market rates and that you have the disaster coverage you need.
Putting these pieces in place now can provide some reassurance that if the worst happens, you’ll have the resources to recover.
