Scott Sheldon’s first thought as the recent California wildfires raged near his home was making sure his family stayed safe through two evacuations. When the immediate threat passed, the mortgage banker faced another major disruption: Lenders stopped all residential financing in the area, leaving many of his clients unsure if they could close on their home sale or refinancing.
Six of his client’s loans in escrow were thrown into limbo, scheduled to close the week of the wildfires, but then delayed indefinitely. “Any kind of residential loan secured by real estate was not happening,” says Sheldon, branch manager at New American Funding in Santa Rosa, California. “Everything has been prolonged.”
The same scenario plays out whenever a wildfire, hurricane or other calamity strikes. Fannie Mae and Freddie Mac—the largest guarantors of home loans—stipulate that lenders can’t fund mortgages backed by property in FEMA-declared disaster areas. That means no home sales can close; no refinances can be completed; and no credit lines or equity loans can be extended until the declaration is lifted or Fannie and Freddie offer new guidance for lenders.
Even when the all-clear is given, as is now the case in California and the hurricane zones in Florida and Texas, it’s not business as usual. Mortgage lenders must take extra steps to verify it can still lend on a property, especially if the home has been damaged. For nervous buyers, sellers and homeowners, the best approach is to wait and see, says Sheldon. Here's what to expect.
A new inspection
As soon as possible, the buyer (or homeowner in the case of a refinance or other mortgage credit) must order a post-disaster property appraisal, which includes an exterior inspection and an analysis of market data to determine if the home’s value has declined since the original appraisal. It can be executed by the original appraiser, another licensed appraiser, or a licensed property inspection company. If the home was flooded, a mold test may also be required. If mold is found, the seller should expect to pay $2,200 for remediation or lower the sales price to reflect the repairs needed.
If your home is damaged to the point that it’s unsafe or the losses are uninsured, then the seller must repair the property first before a lender will finance a home loan. But if the home has been damaged, but its structural integrity remains safe and sound and the repair costs are covered by insurance, then Fannie or Freddie will allow the buyer’s lender to fund the home loan. In this case, the lender will ask for professional estimates of the repair costs along with proof that the seller’s insurance will cover the repairs in full.
Possible extra costs
Home buyers should be ready to pay between $200 and $500 for that new inspection, depending on the size of their home, and any additional tests, such as a $800-$900 mold test. That’s not all. Buyers (and those seeking to refinance) could also lose a mortgage-rate lock—the guarantee that your lender will provide a specific interest rate if your mortgage closes by a certain date—because of the delayed closing. Ask if the lock can be extended—without a fee—given the extraordinary circumstances.
And who pays for the cost of the new inspections and tests may of course be subject to discussion. In our California example, Sheldon’s firm is swallowing all costs related to lost rate locks and post-disaster appraisals. “It’s not the borrower’s fault and we have the money,” he says. “But it’s lender by lender.” Renegotiation More than just who pays the various fees may be reopened after a calamity. Depending on the damage to the property, a buyer may want to renegotiate the sales price. After Superstorm Sandy in 2012, home sellers in New York and New Jersey who needed to offload their properties reduced their prices by 5% to 15% to complete sales. It also may be the lender that wants to redo the loan if the new appraisal comes back markedly lower from the original one.
A lost sale, potentially
Depending on the extent of the damage, a buyer may consider walking away from the sale altogether. Many home sales contracts include a “force majeure” clause that nullifies the contract in unforeseeable circumstances, such as natural disasters. Often, the provision says that if the damage to the property is less than 5% of the total value of the contract, then the seller and buyer agree to move forward with the sale as long as the damage is repaired. But if the damage is more than 5%, then the buyer has the right to cancel the purchase without losing his good-faith money deposit, which is typically between 1% and 3% of the sales price.