These Financing Options Help Homeowners After Disaster Strikes

Tim Lucas
Military VA Loan editor

Getting on with your lives after a natural disaster or fire destroys part or your entire home can be devastating. But what happens when your home insurance doesn’t cover all or any of the damages?

A lot of people in Napa Valley, Calif., found out in August what it’s like to not have earthquake insurance when a magnitude 6.0 earthquake rocked the wine country. Only 5 percent of homeowners in the region had earthquake insurance, according to the California Department of Insurance.

So what do they do next? Well, they turned to the U.S. Small Business Administration (SBA) for disaster loans to get the money they needed to fix up their homes.  The loans have been around as long as the agency has – nearly 60 years, says Rick Jenkins, spokesperson for the SBA Field Operations Center in Sacramento, Calif. The loans are available to those who are in areas declared disaster areas.

SBA has the ability to refinance all or part of a previous mortgage when the applicant does not have credit available anywhere else or has endured damage not covered by insurance. Loans also can be increased by as much as 20 percent of the losses (not to exceed $200,000) to help protect the property from any future disasters of the same kind.

“The loans have been available to homeowners impacted by disasters that have been declared a disaster area either by the SBA or the president of the United States. It can be everything from a small disaster that impacts 30 to 40 residents or up to the scale of Hurricane Katrina,” he says.

The loans are low interest and for long term, if needed.  They were running a little less than two percent below conventional loans recently at 1.93 percent, according to Jenkins. The terms for the loans can be up to 30 years, but are determined depending on what the borrower’s ability to repay it.

Homeowners can apply for any amount from $100 to $200,000 for their primary residence. If it’s a second or vacation home, they are out of luck. The loans don’t cover those. However, qualified rental properties could be eligible for assistance through the loan program.

Homeowners and even renters can also borrow up to $40,000 to use toward replacing damaged or destroyed personal property including furniture, vehicles, appliances and clothing. This loan, however, cannot be used to buy back luxury or irreplaceable items such as antiques, pleasure boats and fur coats.

“Home insurance is their first line of defense. Our loans can’t duplicate the insurance or other recovery money in making the repairs to the property. Homeowners have to use those monies first,” he says.

However, sometimes insurance hasn’t kept pace with the value of their homes. And some homeowners just get caught in a situation where they didn’t have flood or earthquake insurance because their area wasn’t subject to such catastrophes – hence, that’s why not many had earthquake insurance in Napa.

So far, more than $18 million in disaster loans have been taken out by homeowners in that area since they were offered starting in September 2014, Jenkins says.

A SBA disaster loan is a little different than an FHA or conventional mortgage loan.

“We do things differently than a bank. We check to see what your monthly budget can afford after all of your other expenses,” he says.

The SBA checks to see if the applicant can afford to repay the loan and if their credit history shows that they have a habit of paying bills on time.

“We’re not as stringent as a private sector lending institution, but we are still responsible to the taxpayer since these loans come from taxpayer money. We make sure that these loans can be repaid,” he says.

In fact, repayment of these disaster loans is at 90 percent – which is very high in the loan industry, Jenkins says.

“People tend to pay their federal obligation,” he says.

Even for those who do have earthquake insurance, they may need to take out a disaster loan just to pay for the high deductible on their insurance before they can begin to make repairs on their home.

“Earthquake insurance has enormously high deductibles. For example, if you had a $200,000 home with a 10 percent deductible for earthquake insurance, you would have to pay out $20,000 before the insurance kicks in,” Jenkins says.