Insurance Proceeds If a homeowner received a final loss payout from insurance and the check was
made out directly to the homeowner, the homeowner can use the funds to cover mortgage payments while making minimal repairs to make the home habitable and code compliant. But in most cases, a check from insurance will be made out to the homeowner and mortgagee. The mortgagee will hold insurance proceeds in excess of $10,000 in an escrow account, releasing the first $10,000 when the homeowner is able to submit a repair bills equal to or greater than $10,000. The remainder of the funds is only released once repairs have been completed. Once all contractors submit paid in full receipts to the lender and release any and all liens, the homeowner must notify the lender that repairs have been completed and the property has been restored to its pre-disaster condition. The mortgage servicer will inspect the property, and if satisfied that repairs have been completed, any remaining balance of the insurance funds in escrow will first be used to pay any arrearage, and then, at the owner’s discretion, to pay down the principal or to be sent directly to the homeowner to cover payments going forward (or for whatever she wishes). The homeowner will need to submit a letter of intent to the mortgage servicer indicating how she wishes to have the funds applied.
In some cases, the homeowner may have no intention of repairing the property
because it has been rendered uninhabitable or has been condemned, and the homeowner has determined that it is not possible or feasible to make repairs. The homeowner’s mortgage deed will likely indicate how insurance funds are to be applied where the home has been condemned after a natural disaster. In most instances, the insurance funds in such a case will be applied to arrearage first and then to reduction of principal. Some lenders leave it to the servicer’s discretion. As soon as possible after the disaster, if the homeowner does not intend to make repairs, she should send a letter of intent to the servicer indicating how she wishes the proceeds to be applied, citing to the mortgage deed if appropriate, and providing documentation to prove that the property has been condemned or is uninhabitable. If the homeowner expects to receive additional funding due to the loss of the home at a later date, for instance, because the locality will be purchasing the home at its pre-disaster value through the FEMA Hazard Mitigation Grant Program, the borrower may request that insurance funds be used to cure any arrearage, put in escrow to cover one year’s worth of payments, and the remainder to be used to reduce principal. If no additional funding is expected, the homeowner should pursue a deed in lieu.
Other Options In addition to the options listed above, homeowners may seek modification of
their loan terms, explore refinancing options, or determine that maintaining the home is not financially feasible, and look to a HAFA short sale, traditional short sale, deed in lieu, and so forth.
Many large mortgage servicers are not competent to address the needs of borrowers whose homes have been damaged or destroyed by natural disaster. If your
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