At the closing for your home purchase or refinancing, you are required to sign a promissory note that says you’ll make the mortgage payments every month. That agreement remains in effect even if your house burns down. You’re also required to report any loss to the lender and your insurance carrier promptly.
But a reprieve is still possible. For example, a lender might allow a borrower to suspend mortgage payments for a defined period of time or might put a hold on foreclosure activity.
Based on the standard Fannie Mae or Freddie Mac mortgage form, a borrower must repair or restore the property as long as that is financially possible, unless there is a different agreement between the parties. As a result, you can’t simply walk away after a fire. If you do, you risk defaulting on your mortgage.
However, in some cases you might have other options, especially if you have a so-called jumbo loan. For such loans, Fannie Mae and Freddie Mac guidelines do not apply.
If a borrower intends to rebuild the property, the lender or loan servicer typically holds the proceeds in escrow to disburse during the construction. But if the insurer disputes the amount of the loss or the lender raises issues about the schedule for disbursing the funds, problems can arise for the homeowner.
In such a situation, the homeowner can hire a public adjuster to manage the relationship with the insurer, and an attorney to represent him or her in negotiations with the lender.