When natural disasters and rising homeowners insurance costs are making headlines, many homeowners may start thinking about the “what-ifs.” In one particular area, taking proactive steps can help alleviate some of these concerns.
Often, individuals who experience a devastating loss are not fully informed about how insurance payouts work with mortgaged homes — or the need to collaborate with both their insurer and mortgage company.
“When a family has lost everything, they may not have the mental capacity to handle those details,” explains Brittnie Panetta, a personal injury lawyer who has assisted California wildfire victims. “Their focus is on rebuilding and moving forward.”
Understanding the insurance and mortgage process beforehand can prevent additional stress during an already challenging time. Learn about what happens to your mortgage in the event of a home loss, the collaboration required with your mortgage company, and proactive steps to ensure you have the necessary resources in case of a disaster.
Initial Actions
Even if your home is completely destroyed, the mortgage obligation remains, and you are still responsible for payments. In the aftermath of a disaster, one of the first calls should be to your mortgage servicer, the entity to which you make payments.
If you require the funds allocated for mortgage payments to cover immediate expenses, inquire about forbearance. Forbearance allows you to pause loan payments temporarily without penalties or credit score impact. While not forgiveness, it provides short-term relief.
Notify your servicer about the situation even if you can continue making payments. Home loan agreements often mandate informing the lender or servicer due to their claim on the property.
Rebuilding or Loan Repayment
Homeowners facing a total loss must decide whether to utilize insurance funds for rebuilding or mortgage payoff.
The decision-making process can be challenging, as emphasized by Jennifer Beeston, a branch manager who assisted wildfire victims. Understanding the financial implications and options is crucial during this emotional period.
Mortgage agreements may contain complex terms regarding insurance and rebuilding, but essentially, the homeowner and lender must agree on using insurance proceeds for mortgage payoff or reconstruction.
During the rebuilding phase, mortgage payments continue, adding to the homeowner’s financial burden. Loss of use coverage and FEMA housing assistance can help offset these costs.
If rebuilding is not feasible, homeowners must use insurance proceeds to clear the mortgage. It’s essential to note that insurance policies may offer lower settlements for loan repayment than for reconstruction.
Preparation for the Future
While disasters are unpredictable, proactive measures can enhance your readiness. Take steps now to access mortgage-related information easily and review your homeowners insurance coverage thoroughly.
Storing key documents securely, such as in the cloud, and maintaining records of expenses can streamline the claims process in case of a disaster.
By taking these proactive steps, you can have peace of mind knowing you are better prepared to handle unforeseen circumstances effectively.