A Mortgage Forbearance Can Help You Weather a Disaster
Calling your insurance agent after your home has been destroyed in a fire, hurricane or other natural disaster is likely to be one of the first calls you’ll make after letting your family know you’re safe. Your next call should be to your mortgage lender - to inform them of the loss and perhaps to inquire about a mortgage forbearance.
While banks can have a reputation for being hard-nosed when it comes to being paid on time by their borrowers — just ask George Bailey what he thinks of Mr. Potter — they don’t want to be seen as the jerks who foreclosed on someone who lost their home to a hurricane.
Mortgage bills are still due to be paid after a home has been destroyed, whether an insurance company covers the loss or not, says Casey Fleming, a mortgage advisor and author of “The Loan Guide: How to Get the Best Possible Mortgage.”
Money can be tight after losing your home in a disaster, and paying your mortgage may be difficult. But unless you’ve lost your job or can’t work for awhile, your lender will likely expect your mortgage payment to be paid after a disaster, Fleming says.
However, after a disaster they’re likely to work with you and should be open to deferring payments for a few months, he says. Known as a mortgage forbearance, it’s a temporary suspension of payments for a set period.
Take a ‘mortgage holiday’
Real estate broker David Schein has lost two rental properties to disasters — a three-plex in Virginia to flooding in 2003, and a house in Houston to fire in 2016.
Schein, who is also the director of graduate programs and an associate professor at the Cameron School of Business at the University of St. Thomas in Houston, was still able to make the loan payments on his Houston property after the fire, but he got a four month “mortgage holiday” from his bank for the property in Alexandria, VA.
He called the bank and asked for the delay because without renters, he was unable to have income from the property to pay the mortgage, he says. The bank agreed and added four months of payments to the end of his mortgage, which is how long it took for home repairs to be made
What helped, Schein says, is that he made every payment on time before the flood, and has since made every payment on time.
You may not even have to contact your lender, Fleming says. Banks may be proactive and offer the deferment to you as a sign of good will after your home is destroyed. Your bank will know if your home has been hit by a disaster in one basic way: it will be paid by your insurer if it’s a covered loss because the bank controls the payout from the insurance company.
While the insurance settlement check will be payable to both the borrower and the lender, the lender controls the payout until the borrower pays off the loan in full. Any money left can be used to rebuild or buy another property.
Rebuilding can require a new loan for the construction of the new house, called a building loan, that can be for 12 to 18 months and have a higher interest rate than a traditional mortgage. One construction is completed, any remaining debt can be put into a new home mortgage.
If the borrower decides to leave, they’ll still own the land on the vacant lot.
The interest clock is still ticking during a mortgage in forbearance, which can be for a year and possibly longer, Fleming says. Interest is still being charged during that time, and the deferred interest that accrues will either be added with extra loan payments for that mortgage holiday, or with increased payments during the existing loan.
Either way, expect your monthly mortgage to increase after the deferred interest is computed into a new payment. Homeowners should run the proposed agreement by their financial adviser to make sure they understand the terms, Fleming advises.
Walk away from uninsured loss?
One reason lenders offer a mortgage loan forbearance is that they want to help homeowners avoid not making payments and foreclosing. It’s more profitable for a lender to keep the loan than to sell it in a foreclosure.
“If it’s an insurable loss, it’s rare for the homeowner to walk away,” says Fleming, a former home appraiser who in 1989 saw homeowners in the Loma Prieta earthquake walk away from their home loans because the losses were uninsured. Earthquake insurance is expensive and few people have it in California.
To deal with uninsured losses, homeowners can do what’s called a “short payoff,” which is like a short sale on a home you can’t afford but involves refinancing a loan so that you retain the property, Fleming says.
After getting disaster relief funds and a low-interest loan from FEMA, for example, such a homeowner would talk to their lender about paying off a portion of their loan and refinancing the rest so that they could afford to stay in the rebuilt home, he says.
Houston isn’t in a flood zone and the recent flooding there from a hurricane could leave many homeowners with an uninsured loss that could be turned into a short payoff, Fleming says.
One downside is that a short payoff is considered the same as a foreclosure for credit purposes, so it will stay on a credit report for 10 years and will affect the ability to get a mortgage for seven years, he says.
Don’t forget property taxes
If you’re having financial difficulties after losing your home in a disaster, your property taxes will also continue to be collected and you may need to call your tax assessor to ask for a delay if you need it.
Like banks, tax assessors are likely to be proactive after a disaster and may suspend tax collections and even forgive property taxes for people who have lost their homes, Fleming says.
Schein, who is still working to rebuild a rental home he owns in Houston a year after a fire, says he was told by his tax assessor that the property is so valuable that he needs to come up with the $1,200 in monthly property tax he owes even though the home is unlivable for now.
“It was a bit shocking to me when you have a big issue like this, that the tax authorities weren’t able to give me a tax holiday,” Schein says.