Do you still have to pay the mortgage if your house burns down?

General Questions
#1

We’ve had two huge fires here in Northern California in the last five months, the Carr fire and now the Camp fire with 10’s of thousands of homes burned to the ground in the last one.

What happens to the mortgage is you don’t have fire insurance?

Do you keep paying for something that’s not even there anymore?

If you don’t pay the Bank forecloses and is left with just an empty lot? Is that true and then what they sell the empty lot and take a loss?

If you do have fire insurance does the Bank get the money first or can you keep paying the old mortgage and rebuild?

#2

A mortgage invariably comes with an obligation to insure the property, especially for catastrophic loss. If the circumstances of a property are such that it’s not possible to get insurance for certain catastrophic losses (it’s on the edge of an eroding cliff, for example), then it will be extremely difficult to get a mortgage.

#3

It is almost impossible to get fire insurance in Northern California

#4

It’s just the same as if your car burns. You borrowed the money and it has to be repaid somehow.

#5

Cite? There’s a state-sponsored insurance scheme if you can’t get it in the open market.

And more relevantly, do you have a cite for any mortgage provider that doesn’t require it?

#6

And, just the same, anyone who lends you money to buy a car requires insurance.

#7

But mortgages work a bit differently than car loans, at least in some places.

When it comes to mortgages, California is one of twelve “non-recourse” states. This means that, in California, in most circumstances you can walk away from your mortgage, and all the lending institution can do is take the house. If the house is worth less than what you owe them on the mortgage, the bank basically eats the loss. There were a bunch of people doing this during the mortgage crisis ten years ago.

So, say someone buys a house for $600,000 and the following year the market collapses, leaving the house worth 300,000. The person might still owe the bank all $600K, but if they live in a non-recourse state, they can basically give the keys back to the bank and walk away.

In the other 38 “recourse” states, banks can come after you for the shortfall. They could sue you for the $300K difference between what you owe them and what the house is worth. They don’t always pursue this, because people who default on their mortgage often don’t have much to go after, but there are some circumstances where people default on their mortgage and still have other assets that can be taken.

What I’m not sure about, though, is how the “non-recourse” rule would apply to a situation where your “house” is worth almost nothing because it has been burned to the ground. As Riemann has noted, almost every institution that provides a mortgage also requires some sort of insurance policy on the property, but I wonder what would happen in a case where a homeowner, for whatever reason, had no coverage for their house and it was destroyed by fire. Does the “non-recourse” rule require the house itself to be standing and in good condition? I don’t know. I’d be interested to see how a situation like this works.

#8

A number of the homes in the areas being burned belong to rather wealthy individuals who did not necessarily need to have a mortgage, and so may have forgone insurance, even if on a mortgage, they may have been considered self bonded.

At the same time, by the nature of them being rather wealthy, the loss may suck, but shouldn’t be as devastating as it would be for someone who has that as their actual only house.

#9

With non-recourse, you don’t walk away scott free. You do take a massive hit to your credit rating. Better than being underwater on a mortgage, but still not a no consequence action.

As far as if the homeowner had no insurance, if the terms of the mortgage state that the homeowner needs to have coverage, then the homeowner would be in breach of contract. As to how that plays out, IANAL, but I would assume that it would remove at least some of the non-recourse protections of them not being able to come after you.

#10

It depends on the state. About a dozen are ‘no-recourse’ states which mean if you default, the bank gets the property and you’re even. In ‘recourse’ states, yes, you owe it. You’re taking out a loan. It’s a loan secured by an asset, but still a loan. If you owe say 100k, the house burns down and the bank can sell the ashes for 10k, then the bank can come after you for the remaining 90k.

In this particular case, California is no-recourse, so their credit score will take a hit, but they can walk away without owing more.

#11

I can envision two scenarios. One would be where the insurer refused to pay out due to some exception that was not the fault of the homeowner. In that case, if the mortgage lender had accepted the insurance originally, presumably the dispute is between the lender and the insurer. But I’m also interested in what would happen in a non-recourse state if the insurer refused to pay out because the homeowner somehow violated the conditions of the insurance.

#12

But this begs the very question I was asking in my post. Yes, California is a non-recourse state, but it’s still not clear to me how non-recourse works if your house has been burned down. As k9bfriender notes, the mortgage is a contract, and if it requires insurance, then failure to have insurance is a breach of that contract. What I’m not sure about is whether that breach of contract has any effect on the non-recourse aspects of California mortgage law.

Riemann provides some possible scenarios in post #11, above, but I’m not sure that we have a definitive answer here. The California law regarding deficiency judgments on mortgages can be found here, although it doesn’t seem to me that it explicitly addresses the question we’re trying to answer.

#13

If you don’t know this , you really should not use your house insurance for minor stuff. If you do , they just cancel the policy and it’s hard to get a new one. I speak from personal experience.

Homeowner insurance should only be used for major things like your house burning down.

#14

When we bought a house in Tokyo, they advised against earthquake insurance.

Basically, if the big one hits Tokyo then all the insurance companies are going to go under and wouldn’t be able to pay.

However, in other quakes in which the entire economy didn’t collapse, people who didn’t have insurance were SOL, still n the hook for the amount of mortgage remaining.

#15

Also from experience, sometimes even calling to ask “Is xyz covered?” With no claim filed counts against you as a “zero dollar claim”. If you call, make sure tell them this is NOT A CLAIM!

#16

It would be pretty hard going into court and admitting that ‘I breached the contract provision requiring house insurance’, but I want the court to enforce the no-recourse provision of that contract against the lender.

#17

It’s not required if your house is paid off. I mean, you’d have to be an idiot or forced into it by finances…but it is not required.

But as Riemann notes a lender is almost always going to require some minimum level of hazard insurance including fire and you CAN get it. It’s just that people in fire-prone areas might find it pricey, relatively speaking. The folks that are uninsured in the wake of events like the Camp Fire are usually people who have paid off their home and are trying to economize by living dangerously. Mortgage-holders might be underinsured for fire because they went with the minimum and didn’t update their policies, but they’re almost never going to be uninsured.

ETA: And Northern California is way, way to broad. I had exactly zero difficulty getting fire insurance - it was just standard with my policy. You’re not going to have any problems getting fire insurance in, say, San Francisco.

#18

And others may belong to people who aren’t so wealthy, but have lived there long enough to get it all paid off.

#19

The home with a mortgage will not be without insurance. If the mortgage holder does not pay the insurance priemumn the insurance company will notify the bank about insurance expiring. The bank will notify the mortgage holder their insurance is about to expire and if the mortgage holder does not take care of getting insurance the bank will take out insurance on the property. Normally the rate is high and only large enough to cover the balance of the mortgage and nothing else.

House burns down bank gets the mortgage paid off. Home owner now has land fully paid off but not home.

#20

Do people who buy property on contract have to insure it?

I’m asking this in part because I found out via Facebook that one of my HS classmates, and her husband, belong to some kind of fringe political or religious philosophy where they (among other things) do not believe in banks or insurance. I looked up the real estate records for their county, and found out that her parents, who are very wealthy, bought their house for them and then sold it to them in contract.

I once bought a house on contract, and I certainly had it insured. I definitely carry renter’s insurance, and even did when I was in college. I mean, I pay about $100 a year for $40,000 in replacement coverage. It’s not expensive, at least not where I live.