Losing your home in a fire is an extremely traumatic event. Not only have you lost your most valuable possession, but now you have to navigate the confusing financial aftermath. One of the biggest questions people have after a house fire is: what happens to my mortgage?
Unfortunately, a disaster like a house fire doesn’t let you off the hook for your debts. There is no way around paying off your mortgage if the house is no longer there. You can handle this tough situation, though, if you plan ahead and know what you’re doing.
You Are Still Responsible for Your Mortgage Payments
The first thing to understand is that your mortgage does not automatically disappear after your house burns down. A mortgage is a loan that is secured by real estate, but it is not directly tied to the physical structure. So even if the home is completely destroyed, you still owe the remaining balance on the mortgage to the lender.
Your mortgage servicer will expect you to continue making your regularly scheduled mortgage payments following a fire If you stop making payments, you risk going into default, which damages your credit and can lead to foreclosure. This is true even if you have mortgage insurance, since that only protects the lender, not the borrower
Your Homeowner’s Insurance May Help
The good news is that your homeowner’s insurance policy may provide some relief, depending on your specific coverage. If the fire damage is covered, your insurance company may pay out all or part of the remaining mortgage balance directly to the lender.
However, this isn’t a given. You should carefully read your insurance policy and call your agent to make sure of the details. Damage from some types of disasters, like earthquakes or floods, might not be covered.
Beware of Force-Placed Insurance Policies
One tricky situation involves force-placed insurance policies. If you failed to maintain your own homeowner’s insurance, the mortgage lender likely took out a policy on your behalf to protect their investment.
With force-placed policies you may be required to continue making mortgage payments even if the home is destroyed. The lender expects you to use the insurance payout to rebuild. Definitely clarify this with your lender ASAP after a fire loss.
Seek Mortgage Relief Options
If you can’t pay your mortgage after a fire, you need to call your mortgage servicer right away and ask for help. When a disaster happens, disaster-related mortgage forbearance temporarily stops or lowers your monthly payments for a certain amount of time, usually 12 months.
This gives you time to rebuild and get back on your feet financially. You will still owe the missed payments later on, but it prevents you from going into default right away.
Longer term relief may be available through mortgage modifications that permanently lower your interest rate or extend the repayment period. But you have to take action and apply for help – it won’t happen automatically.
Don’t Abandon Your Obligations
It can be very tempting to walk away from your mortgage commitments after losing your home. However, this should be avoided at all costs! Abandoning your property would severely damage your credit just like any other foreclosure situation.
Instead, keep in touch with your lender and insurance company to make sure you know all of your options. You might be surprised at how much help they can give you. But you need to be proactive and use any programs that can help you.
Selling a Fire-Damaged Property
If rebuilding is not feasible, you may want to consider selling the fire-damaged property. Even with a remaining mortgage balance, companies exist that specialize in buying damaged properties. They can pay off your mortgage at closing and allow you to move on.
Just understand that with extensive damage, you will likely have to sell at a significant discount compared to full market value. But it’s often better than letting the property fall into foreclosure.
Other Insurance Coverages Can Help
Aside from paying off your mortgage, your homeowner’s insurance may provide additional living expense funds and cover replacement costs for damaged personal belongings. Maintain detailed records and receipts for all fire-related costs.
Also look into whether you have separate earthquake, flood or fire insurance policies that could offer additional payouts. But read the fine print for exclusions.
Reassessing Property Taxes
After a fire, you can request to have your property value reassessed for tax purposes to reflect the loss in value. This could lower the property taxes you owe going forward. Just be aware that some taxes are still likely owed on the land itself.
Create a Detailed Inventory Now
The best way to prepare for potential disaster is to create a comprehensive home inventory today. Thoroughly document all your possessions and store this inventory outside your home. This makes filing insurance claims and replacing belongings much smoother.
Losing your home to a fire is incredibly difficult both emotionally and financially. But remember that knowledge is power. By understanding exactly what happens to your mortgage and proactively seeking assistance, you can overcome this challenge and eventually rebuild your life. With preparation and perseverance, financial recovery is possible after a house fire.
#1: My home burned down. Do I still have to pay my mortgage?[/et_pb_text][et_pb_text _builder_version=”27.4″ _module_preset=”default” theme_builder_area=”post_content” hover_enabled=”0″ sticky_enabled=”0″]
The short answer? Yes. Anyone with an outstanding mortgage loan still owes the lender the money they agreed to pay.
That said, homeowners impacted by a natural disaster can apply for a forbearance on their mortgage loan, which can pause payments for up to a year.
Mortgage companies are required to offer forbearance on the roughly 40% of home loans backed by Fannie Mae and Freddie Mac. Loans backed by the Federal Housing Administration (FHA) as well as the Department of Veterans Affairs (VA) also provide this option.
Forbearance is often granted in three- to six-month increments.
Loans without federal backing—like the jumbo mortgages on the multi-million homes that burned down—may also be eligible for forbearance, though it depends on the mortgage companies servicing those loans.
Large banks like JPMorgan Chase and Bank of America have already announced they would offer disaster forbearance to assist homeowners impacted by the L.A. wildfires.
Forbearance has been expanded in recent years to protect consumers during most financial hardships. And anyone who paused their mortgage payments during the COVID pandemic will be familiar with the process of applying for one.
As your clients’ agent, encourage them to contact their mortgage servicer as soon as possible to request a forbearance to avoid late fees, penalties and foreclosures.
After forbearance, mortgage holders will need to repay the remaining balance of their loan, but options like disaster payment deferral can help them avoid lump-sum repayments.
Clients who can’t keep up with regular mortgage payments after the forbearance period ends can also ask their mortgage lender to modify the loan, which could mean stretching out the remaining payments over a longer period or refinancing at a lower interest rate.
Granted, that’s a negotiation between your client and their mortgage company. And there’s no guarantee the borrower will be happy with what the company offers. [/et_pb_text][et_pb_text _builder_version=”4.27.4″ _module_preset=”default” theme_builder_area=”post_content” hover_enabled=”0″ sticky_enabled=”0″]
#4: Where do I get help finding temporary housing? [/et_pb_text][et_pb_text _builder_version=”27.4″ _module_preset=”default” theme_builder_area=”post_content” hover_enabled=”0″ sticky_enabled=”0″]
If any of your clients are displaced and searching for temporary housing, there are several resources available:
- Airbnb.org & 211 LA: Provides free temporary housing for those displaced by wildfires.
- Discounted Housing: Some landlords, like the Balaciano Group in the San Fernando Valley, and hotels are offering discounted rates for fire victims.
- Hotels: Use this list from the local hotel association, which includes information on discounts for fire victims and evacuees, to help clients find temporary housing in a facility with more or less standardized resources and amenities.
- Short-term Rentals: If your client doesn’t qualify for free or discounted housing from Airbnb.org and 211 LA, they can still find reasonably-priced temporary housing with Airbnb, VRBO, Pacaso, etc.
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Use the list in the BAM Resource Guide for more options.[/et_pb_text][et_pb_text _builder_version=”4.27.4″ _module_preset=”default” theme_builder_area=”post_content” hover_enabled=”0″ sticky_enabled=”0″]
What Happens to Your Mortgage If Your House Burns Down?
FAQ
Does insurance pay off your mortgage if your house burns down?
If a homeowner can’t or doesn’t want to rebuild, they would have to use their claim money to fully pay off the mortgage on the destroyed home. It’s important to know that insurance policies may pay out smaller settlements for mortgage payoff than for rebuilding.
Do you still pay mortgage if your house is destroyed?
Panetta says, “the mortgage still lives on, unfortunately,” which means you still have to pay it even if your house is broken into. That’s why one of the first things you should do after a terrible event is call your mortgage servicer.
What happens to your mortgage if your house is destroyed in a natural disaster?
Nothing happens to your mortgage. The mortgage is safe in a banks hard drive. You as a mortgage holder need to have homeowners insurance that can cover the mortgage in case your home gets destroyed by natural disaster, fire, flood or a drunk driver.
What happens if your house burns down and you don’t have insurance?
The Federal Emergency Management Agency (FEMA) offers grants to those affected by disasters without insurance covering the damage. Grants can be used for basic home repairs, temporary housing and replacing personal property, such as vehicles, appliances and furniture.