Imagine being woken up in the middle of the night by loud banging on your front door. You rub your eyes to remove the sleepiness from them. That’s when you notice that there’s smoke in the air. You finally listen to what your neighbors are shouting. “Fire! Fire!,” they say, and you quickly get out of bed, rouse your family and run outside.
This is exactly what happened one fateful night in a San Antonio East Side neighborhood. “This was a very large fire,” Joseph Arrington, a public information officer for the San Antonio Fire Department (SAFD), told KSAT.com. “Crews worked very aggressively to keep it to those four structures.”
Unfortunately, at least two homes got destroyed. “The main structure fire was unoccupied. It was being renovated. It was gonna be a total loss,” Arrington said. The house sitting behind the structure where the fire started was also ruined. “It’s going to be difficult to determine [the] cause because of the total loss nature of the primary structure,” the fireman added.
This story is just one of many. It shows how a fire or other natural disaster like floods, earthquakes, hurricanes or fire can lead to total loss claim. If you have a mortgage, and your home has suffered severe damage or been destroyed, some or all of the payment checks from your insurance company will be made payable jointly to both you and your mortgage company. Get expert help when dealing with such a large claim.
What is Total Loss?
Total loss refers to the loss resulting from the destruction or damage of an insured property which is unrecoverable or unrepairable for further use. Total loss can happen when a house gets totally destroyed by a fire, storm, flood, or other natural disaster.
Here’s another example. Remember Katrina? The hurricane demolished houses, businesses, and property from Louisiana to Mississippi to Alabama. The natural disaster wreaked havoc on large swaths of coastal areas as well as miles inland.
“Hurricane Katrina was one of the worst natural disasters in our nation’s history and has caused unimaginable devastation and heartbreak throughout the Gulf Coast Region,” then-president George W. Bush said. “A vast coastline of towns and communities has been decimated.”
One of those coastal towns was Waveland, Mississippi. Then-governor Haley Barbour said: “The 80 miles across the Mississippi Gulf Coast is largely destroyed. A town like Waveland, Mississippi, has no inhabitable structures—none.” In the end, Katrina left an estimated 300,000 homes either completely destroyed or uninhabitable.
Total loss is a nightmare and leaves homeowners with various headaches, from where to stay and how to move forward, including how to deal with their mortgage after a disaster event.
How Can Total Loss Affect Your Mortgage?
After losing your home to a natural disaster, the last thing you want to think about is mortgage. But, it’s important to note that your lender will still ask you to pay your mortgage payment. Yes, you heard that right! You’re still obliged to pay the mortgage on your house even if the structure is no longer standing, has been completely destroyed, or unlivable after a disaster event.
So, the short answer to the question of how total loss can affect your mortgage is this: Total loss doesn’t affect your mortgage at all. That is, your mortgage payments will still become due and you’ll still be required to pay it.
If you fail to pay your mortgage, your loan could be put in default. In worst-case scenarios, defaulting on your mortgage can lead to a foreclosure. When this happens, you’ll lose ownership of your property.
How to Deal with Mortgage Payments After a Total Loss
While a natural disaster can bring you to your feet, fortunately, you have options that can help you get back on track and avoid foreclosure of your property. In this section, we’ll focus on the various mortgage relief options available to you.
First on the list is homeowner’s insurance. Here’s how it can help you when you experience total loss after a natural disaster.
Homeowners insurance – When you applied for a mortgage, your lender most likely required you to also get a homeowner’s insurance. This insurance is the lender’s way of protecting their interest in the house. When your home gets hit by a natural disaster, you and your lender both get a share in the proceeds, which is usually the maximum amount stated in your policy, unless your home insurance comes with a property replacement clause.
If your financial capacity has changed for the long-term, it’s best that you take a refinancing or loan modification agreement to your mortgage.
Refinancing – With this option, you can reduce the amount of your monthly mortgage payments and interest. However, this will lead to the extension of your payment period as well as bump up your total payments. The process to get a refinancing is the same as getting a new mortgage, and you’re effectively updating your mortgage terms. If you were originally on an adjustable-rate mortgage (ARM), you can try to get refinancing for a fixed-rate loan so you have a more stable and manageable monthly payment.
Loan modification – While refinancing entails a revision or update on your original mortgage term, loan modification allows you to do so permanently, i.e., it replaces the original terms with a new one. If you’re not eligible for refinancing or are falling behind on your monthly payments, this is your next best bet to negotiate a more affordable mortgage payment term. This might entail extending the payment period and/or a step-rate interest rate, where you start with a below-market interest rate and then eventually move up to the determined market interest rate.
On the other hand, if you believe your financial difficulty is only for the short-term, getting a forbearance, repayment plan, or payment deferral would be better suited for your temporary situation.
Forbearance – In the event of a really bad natural disaster, your lender might push back the due dates or reduce your monthly payments through forbearance. Interest will still accrue but you have the option to either make partial payments or skip paying altogether. You have up to six months plus six more months on top of that to get back on your feet. In addition, your lender may also waive late fees.
Reinstatement – If you have the capacity, this option allows you to pay all your missed payments at once so that you can resume paying the regular monthly mortgage on your home as soon as possible. This lump sum payment option is typically available after forbearance.
Repayment plan – If your forbearance period is coming to an end and the reinstatement option is not viable for you or if you’ve missed your monthly payments, you can avail of a repayment plan. This option allows you to add on the missed amounts to your monthly mortgage payments over a period of time. So, essentially, you’re adding extra payments but it’s a good way to get back on track with your mortgage.
Payment deferral – If you can’t take advantage of the previous two options, you can ask your lender for a payment deferral instead. If they agree, they will move up to two missed mortgage payments to the end of your loan. This results in making your loan current but extends your mortgage for up to two more months. However, your monthly payment remains the same and doesn’t accrue interest.
Whichever option makes sense to your particular situation, remember to inform your mortgage servicer, or the company that receives your mortgage payments, as soon as possible. If you’re unsure which option to take, reach out to a housing counselor for guidance.
What happens to mortgage after a total loss?
Remember, natural disaster like floods, earthquakes, or hurricanes can lead to total loss fire claim. If you have a mortgage, and your home has suffered severe damage or been destroyed, some or all of the payment checks from your insurance company will be made payable jointly to both you and your mortgage company. Get expert help when dealing with such a large claim.
