What Can You Do To Prepare for A Natural Disaster?
Last week, we talked about the effect natural disasters have on homeowners, the real estate market, and the local economies that experience them. One of the points we stressed was that it’s much easier to understand how a disaster affects a given area in general than it is to predict how it will hit individual homeowners’ wallets.
A big concern was the question of whether or not disasters caused an uptick in foreclosures. While there’s evidence to suggest that they do, it varies by location and the severity of the disaster; either way, the local economy tends to not experience much more than a temporary slump. In fact, economic activity usually picks up in the wake of a disaster once the initial shock wears off and the rebuilding begins.
Still, this doesn’t have much bearing on what an individual homeowner might experience. Say, for example that a house on Florida’s coast takes damage in a hurricane from a storm surge, while a house further inland takes only minor damage from the wind; they’re both going to present very different situations for their respective owners. This is not only because of the extent of the damage, but also because of the protections they may already have in place. To mix it up even more, what about a homeowner who returns to find a tree where their living room used to be?
What protections do you currently have in place, and what protections can you acquire? What determines how much hardship a homeowner in particular experiences from a natural disaster, apart from the extent of the damage, is the protections they have in place and their financial status. So let’s explore these concepts.
One of our main points last week was that disasters often affect billions of dollars’ worth of debt attached to the properties that may be damaged. It’s not just about the material cost of the damage; it’s about its affect on debt. That’s why disasters can often lead to a spike in foreclosures.
This is because some homeowners wind up with an extensive bill of damages following a disaster. It’s not surprising that homeowners who are victims of disasters wind up on the hook for repairing the damage to their homes and finding alternate living accommodations while their home is being rebuilt or repaired. This can be a huge financial strain on families, especially when you think about the reality that they also need to arrange those repairs.
When the things are really bad, unemployment is another setback that homeowners might experience if their workplace is damaged by the disaster. All of this adds up to a set of extraordinary expenses that most Americans simply aren’t equipped to handle, and this can affect their ability to stay on top of their mortgage payments.
Fortunately, there are some protections that are built into the system, but they differ by lender and insurer. Most of them are predicated on the assumption that you’re in good standing with your lender, too.
In general, it’s expected that the mortgage servicer evaluate each delinquent mortgage on a case-by-case basis. If the mortgage is delinquent because of expenses related to the natural disaster, then some consideration is expected, and it’s assumed that the servicer will work with the homeowner. Here’s the kicker, though: this only applies if the mortgage was current or fewer than 90 days delinquent before the disaster occurred.
So not only do you need to understand your servicer’s policy on disaster relief, you also need to stay on top of your payments. If you’re already more than 90 days delinquent, then there may not be many options for relief. When a natural disaster significantly damages a property and the borrower’s employment or income (including rental income from an investment property) is seriously affected as a result of the disaster, the status of the mortgage is what determines the course of action.
For the most part, the servicer generally shouldn’t begin or continue any foreclosure action during the 90 days following the disaster event. Instead, they’ll work with borrowers to develop a formal relief provision that doesn’t place undue hardship on the borrower. If a repayment plan can’t be worked out, loss mitigation options such as deed in lieu of foreclosure or pre-foreclosure sale should be considered.
Insurance is something else you need to be on top of, and it’s not just about having insurance. If you live in designated flood areas, you’re eligible for Federal Flood Insurance, but you have to take the initiative to procure it. What we want to emphasize here is awareness of your insurance terms and any amendments and updates that your provider may apply over the course of your plan.
This is because providers tend to want to weight things in their favor; it’s just the way things are, and it’s an actuarial problem for them. They want to minimize what they pay out and maximize what they bring in. Most of the time, this isn’t a problem if you know what to expect. Issues arise when you assume your plan will cover a given expense when they in fact will not. So be on top of things, and this brings us to our final point: savings.
If you live in an area prone to disasters, you’ll want to have a designated disaster emergency fund. It’s just smart planning. Sure, you may have insurance, and you may be on top of your mortgage payments, but unexpected things always happen when disasters strike. You may find that you have to take extra days off work because you need to arrange repairs at a time when literally every contractor in the city is booked solid.
As we mentioned in our last article, a lot of insurers won’t process a payout until you have work orders and invoices, and that can be a huge hassle. The same can even go for mortgage servicers, who may require official claims to be made before going easy on your payments. This means that if you don’t have funds on hand, you can be waiting for longer periods of time between arranging repairs and then getting reimbursed, and you might spend more money in the meantime on lodging if your home is uninhabitable.
This is why it’s best to have a disaster fund. It provides an extra measure of security and gives you some options. Insurer will cover all but $1,200 in damages? No problem. Contractor booked solid for two weeks, meaning you need to pay for a hotel in the meantime? You’ve got it taken care of. It’s better to have a disaster fund and not need it rather than need it and not have it.
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