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What happens with your mortgage when your house is destroyed?

destroyed-houseUpdated by Craig Berry

The Federal Emergency Management Agency (FEMA) has declared 49 major disaster areas so far in 2018, and it's only October. With hurricane Michael's widespread devastation still unfolding, many are focused on windstorms today. Other catastrophic events include severe winter storms, tornadoes, hailstorms and earthquakes -- all can result in complete or partial destruction of your home.

In 2017, the total number of major disasters declared by FEMA was 59. 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.

What happens to your house if destroyed by a hurricane

Hurricanes wreak havoc because they combine two of nature's most damaging forces -- wind and water. If you live near the coast, your best defense against hurricane damage is to make sure you have the proper home insurance coverage and know what to do to support your claim after a storm.

Unfortunately, disasters do not guarantee relief from your mortgage, 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.

Insured losses resulting from hurricane Florence total an estimated $5 billion. The losses incurred from Michael have yet to be tallied.

What happens to your mortgage if your house burns down?

If you home has been completely destroyed by fire, your homeowner's insurance policy should carry a clause that allows you to maintain your standard of living while dealing with the loss.

Of course it's great to know that your insurance policy should be able to help you out immediately following a fire, but what happens with your mortgage loan?

The Federal Housing Administration, FHA, 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, explains 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.

Next to your insurance company, your mortgage lender is your most important contact if your home has been destroyed by fire.

Does homeowners insurance pay off your mortgage if the house is lost?

When you borrow money from a financial institution, the lender has a security interest in your home until the mortgage is paid off. This means, the lending institution typically requires that you insure that home for at least the outstanding balance of the loan.

The possibility of earthquakes, tornadoes, fire or hurricanes is a big reason why homeowners with a mortgage are often required by their mortgage lenders to have hazard insurance. Even still, certain coverages, such as earthquake insurance -- an optional extra coverage -- often feature a very large deductible.

In the event that your home sustains loss or damage that is covered by your homeowner's insurance policy, and you hold replacement cost coverage, your homeowner's policy should cover the cost of your repairs (minus your deductible and any excluded property).

If your home is completely destroyed, your homeowner's insurance policy should have a "loss of use" or "additional living expense" protection, giving homeowners the opportunity to maintain their standard of living while dealing with their loss.

If you live in a mansion, your insurance is likely to cover you living in a comparable home for the interim. Likewise if you live in a modest home.

In addition to meeting your housing needs, this portion of your policy may also cover laundry service and meals. If you are ever in this unfortunate situation, it's important to keep detailed records and receipts of your expenditures as you rebuild your home. This can make the difference in whether you are fully reimbursed or not.

Natural disaster mortgage forbearance

Banking regulators and government mortgage agencies typically issue proclamations after a disaster, directing mortgage lenders and loan servicers to make certain accommodations for borrowers. But these permissions are only guidelines. Lenders are encouraged to work with affected homeowners, with guidelines from regulators such as Housing and Urban Development, 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 Federal Insurance Deposit Corporation, 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.

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