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Do you have to pay your mortgage if your house is destroyed?

The Federal Emergency Management Agency has declared more than 46 official natural disaster areas so far in 2017, and it is only early September. Of course, hurricane Harvey's widespread devastation is still happening, but such events include monster winter storms, tornadoes, hailstorms and other emergency situations.

In 2016, the total number of major disasters declared by FEMA was 75. Few states are immune to natural disasters, and each event affects thousands of homeowners who are forced to cope with the physical and emotional damage, as well as the prospect of perhaps not being able to manage their mortgage payments.

Still, a disaster does not guarantee mortgage relief, according to Laura Vinton, counseling manager at Hope Enterprise Corp., a nonprofit community development financial institution in Gulfport, Miss., a town devastated by Hurricane Katrina in 2005. "Any consideration is determined case-by-case, and it's a two-way process," she says.

Lenders get guidelines, but it does not mean they have to follow them

Banking regulators and government mortgage agencies typically issue proclamations after a disaster, directing lenders and loan servicers to make certain accommodations for borrowers. But these permissions are only guidelines. Lenders are encouraged to work with affectoed homeowners, with guidelines from regulators like HUD or foreclosure or forbearance outlines from Fannie Mae and Freddie Mac joining other guidance from state and local agencies. In general, regulators point out (as in a 2011 letter to banks from the FDIC) that "Extending repayment terms, restructuring existing loans, or easing terms for new loans, if done in a manner consistent with sound banking practices, can contribute to the heath of the community and serve the long-term interests of the lending institution."

Lenders must stay within regulators' parameters and agencies' loan servicing guidelines, says Bob Davis, executive vice president of the American Bankers Association in Washington, D.C., though they still have latitude to consider borrowers' individual situations. For some, that might mean a longer period of forbearance or more flexible payment plan.

Mortgage relief you can expect following a disaster

The Federal Housing Administration traditionally imposes a 90-day moratorium on foreclosures of FHA-insured loans in a disaster area. This freeze, triggered by an official declaration by the current president at the time of the disaster, gives the homeowner "a little more time" to work with the lender and insurance carrier to assess the damage and understand the situation, says Karol Mason, business process quality manager at Wells Fargo Home Mortgage.

Those who still need help after the 90 days are over can try to negotiate additional relief.

"If the customer still needs assistance and hasn't been making the payments for the 90 days, that workout continues on an individual basis," Mason explains.

Mortgage relief for tornado victims

Following one period of devastating tornadoes in the South a few years back, Freddie Mac released a press release "strongly encourag[ing] servicers to help affected borrowers with Freddie Mac-owned loans by":

  • Suspending foreclosure and eviction proceedings for up to 12 months
  • Waiving assessments of penalties or late fees against borrowers with disaster-damaged homes
  • Not reporting forbearance or delinquencies caused by the disaster to the nation's credit bureaus

What happens when relief runs out?

Lenders typically will waive late fees and defer payments following a disaster, but those accommodations might not last beyond a few months. When the time is up, missed payments become due, either in a lump sum or according to a payment plan.

Homeowners who suffer a financial setback, such as a job loss, as a direct result of a disaster also may be offered temporary mortgage relief, even if their home was spared. Documentation will likely be required to prove the hardship.

Borrowers should contact their lender as soon as possible after a disaster, let alone after the standard assistance runs out, Mason suggests. "It's that customer call that triggers all the actions that take place on our side," she explains.

Mortgage relief tips

Vinton offers some good tips for borrowers to follow after a disaster:

• Call your loan servicer as soon as possible

• Take good notes during the conversation

• Follow through on any documentation that is requested and keep copies

• Follow up and make sure agreed-upon accommodations are given as promised

• Contact a housing counseling agency approved by the U.S. Department of Housing and Urban Development for additional assistance

• Notify the credit bureaus that your house is located in a disaster area

What else could happen?

How missed payments will be reported to the credit bureaus is up to the lender, according to Rod Griffin, director of public education at Experian, a credit bureau in Costa Mesa, Calif. He says an account could be reported as current or in deferment. Homeowners also can add a statement to their own report, explaining that their home is in a natural disaster area.

A reduction of loan principal is not an option, according to Davis. Rather, the loan still has to be paid, even if the home is a total loss. That is why lenders require borrowers to purchase adequate homeowners insurance, and why they will force-place that insurance if the borrower lets it lapse.

Homeowners who have received a loan modification face a tricky situation since a late payment can void the previous accommodation. Most will face a choice of either the modification terms or disaster relief, not both.

Remember, a natural disaster does not guarantee mortgage relief. Just because your home has been destroyed, that does not mean you are exonerated from making monthly payments. If your home or your ability to pay your mortgage on time has been affected by a disaster, you, the borrower, are responsible for reaching out to your lender to get the conversation started.

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