With natural disasters and homeowners’ insurance costs headlines, many homeowners may end up living in “what-ifs.” In at least one area, turning that anxiety into behavior can alleviate some concerns.
Many people face unimaginable losses, they don’t realize how insurance payments work with a mortgage home or they need to work with mortgage companies and insurance companies.
“When you have families who just lost everything, they don’t have the mental ability to take it,” says Brittney Panetta, a personal injury lawyer with Matthews & Associates, who worked with the victims of a California wildfire. “You’re just trying to get back on your feet.”
Before you need to understand this process, you can prevent stressing out an already difficult situation. If your home is destroyed, what happens to your mortgage, you may have to work with your mortgage company, and there are steps you can do that now to ensure you have the resources you need in the event of a disaster.
First Step
Even if your home is totally lost, “Unfortunately, the mortgage is still living there,” says Panetta. That’s why it’s the first thing that needs to call after a catastrophic event is for a mortgage servicer. A servicer is the company you pay for, whether it’s your former lender or another company.
If you need the money you spent paying your mortgage to cover other immediate expenses, you will want to ask about tolerance. Mortgage requests allow you to temporarily put the loan on hold and skip payments without facing late fees or credit score losses. Tolerance is temporary and not forgiveness. You need to make up for missed payments. However, the short-term relief it offers can be invaluable.
Even if you continue to pay, you will need to let the servicer know what happened. In fact, most mortgage documents require you to notify your lender or servicer. That’s because the company holding your mortgage is billing your home. That relationship can affect what comes next.
Rebuild or pay back
Homeowners faced with complete losses must make difficult choices. It’s either to use insurance claims to rebuild or pay off your mortgage.
“It’s really tough,” says Jennifer Beaston, branch manager and senior vice president of Rates, who worked with victims of bushfires in California’s Tubbs and camp. “This is a scary, emotional time. But unfortunately, it’s also one of those times when it’s important to really understand mathematics, look at your options and weigh your pros and cons.”
Mortgage documents are often filled with complex languages about insurance and reconstruction, but are generally summarised into a few key points. As mentioned above, the lender must notify you of the loss. The homeowner and lender must then agree whether the insurance payments will be directed to repaying or reconstructing the mortgage. If the homeowner chooses to rebuild, the value of the rebuilt home must be comparable to the destroyed one, and the lender will control the payment of the insurance.
For many homeowners, signing an insurance check is an unpleasant surprise to sign a mortgage servicer.
“It was one of the things people were really upset,” Biston recalls the fire in the Tubbs. “They don’t want someone to take control of their money.
During the reconstruction process, homeowners continue to pay their mortgages. That means paying a mortgage in your home that you can’t imagine while paying for other accommodations. The range of usage, a standard part of most homeowner insurance policies, helps to cover these costs. FEMA Housing Support could also help with this cost.
Homeowners who cannot afford or want to rebuild should use their claim funds to repay the mortgage in full on the destroyed property. It is important to know that insurance policies may pay less settlements for mortgage payments than reconstruction.
“Paying your mortgage at these prices is becoming an unwanted option,” says Panetta, a personal injury lawyer. “Your policy might say you’re insured for $500,000 if you want to pay, but up to $1 million if you want to rebuild. That’s a huge inconsistency in value.”
Plan ahead
You can’t control when a disaster occurs, but you can put yourself in a better position to face it. Here are some important preparation steps you can take right now.
Make sure you have easy access to important mortgage information, such as loan details and servicer contact information. In the past it may have meant keeping these documents fireproof and safe, but today it is probably more convenient to store them in the cloud or in a secure app.
Additionally, keep documents for your budget or regular expenses. These numbers may be required if you need to file a loss of use, as they are calculated compared to normal costs.
The second and obviously much more difficult is reassessing homeowners’ insurance. If you have a mortgage, you will generally need to get insurance from the homeowner. However, we want to make sure that coverage is sufficient to restructure at market rates and that there is the necessary disaster coverage.
Place these pieces now and you’ll feel safe in the event of a worst-case scenario, you’ll have the resources to recover.
Article What happens to your mortgage if your home is destroyed? It originally appeared in Nerdwallet.
Original issue: March 4th, 2025, 3:40pm EST
