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What Happens to Your Mortgage if Your Home is Hit with a Natural Disaster

  • September 27, 2018

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In the wake of last week’s hurricane and with an especially active hurricane season expected, disaster preparedness is more important than ever.  When hurricanes, forest fires, earthquakes, and other natural disasters damage your home or impact your ability to pay your mortgage you have several options.  Before disaster strikes, review these ways to stay safe, physically and financially.

When a natural disaster occurs, the state or local government contacts their regional Federal Emergency Management Agency (FEMA) office to request a disaster declaration.  FEMA officials assess the damage and issue the declaration accordingly.  According to the Stafford Act, there are two types of disaster declarations, emergency declarations and major disaster declarations. 

 

From FEMA.gov:

Emergency Declarations: The President can declare an emergency for any occasion or instance when the President determines federal assistance is needed.  Emergency declarations supplement State and local or Indian tribal government efforts in providing emergency services, such as the protection of lives, property, public health, and safety, or to lessen or avert the threat of a catastrophe in any part of the United States. The total amount of assistance provided for in a single emergency may not exceed $5 million. The President shall report to Congress if this amount is exceeded.

Major Disaster Declarations: The President can declare a major disaster for any natural event, including any hurricane, tornado, storm, high water, wind-driven water, tidal wave, tsunami, earthquake, volcanic eruption, landslide, mudslide, snowstorm, or drought, or, regardless of cause, fire, flood, or explosion, that the President determines has caused damage of such severity that it is beyond the combined capabilities of state and local governments to respond.  A major disaster declaration provides a wide range of federal assistance programs for individuals and public infrastructure, including funds for both emergency and permanent work.

 

The first thing homeowners should do following a natural disaster is to get in touch with their local FEMA office.  You can register for disaster assistance online or by calling 800-621-3362.  Next, review your homeowner’s insurance policy, plus any relevant supplemental policies you may have like flood or earthquake insurance.  Then, contact your mortgage servicer.  Please note, your mortgage servicer may not be the same as your mortgage lender.  In some cases, the servicer will reach out to you, but it’s important to be proactive.

If the disaster makes it impossible to make your monthly mortgage payments on time, you can ask your mortgage servicer for a “forbearance” or an agreed-upon time that allows you to stop making payments.  Most forbearance periods will last up to six months, with an option to extend for another six months as needed.  During the forbearance period your mortgage will still accrue interest, so if you can make partial payments it’s a good idea to do so.  You will still be responsible for payments missed during the forbearance period and may need to catch up by making additional payments later on. 

In addition to insurance payouts, direct federal aid is available in the forms of loans from the Small Business Administration (SBA).  Homeowners can borrow up to $200,000 for home repair or construction costs.  Both homeowners and renters can also apply for up to a $40,000 loan to replace personal property.  When you apply for an SBA loan, the organization will run a credit check before inspecting your property, to preserve your credit score.  FEMA also offers grants, based on the situation and extent of the damage.  In 2017, the maximum grant per household was $33,300.  These funds can be used toward home repairs not covered by insurance, rent if the homeowner is displaced, and other disaster-related needs.  When a home is completely destroyed, homeowners have the option to apply for an FHA 203(h) loan to help rebuild or replace the home. 

If you are affected by a natural disaster that impacts your ability to pay your mortgage, the most important thing to do is not stop making payments without talking to your loan servicer.  Even if your home is completely destroyed, you are still going to be responsible for the loan.  Whether you have a conventional mortgage guaranteed by Fannie Mae or Freddie Mac, an FHA loan insured by the government, or a VA loan guaranteed by the Department of Veterans Affairs, it’s important to get in contact with your loan servicer sooner rather than later.  If you have any questions about who your loan servicer is, reach out to the loan officer who worked on your original loan.

 

Sources: FEMA.gov, MarketWatch

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