Question of the Week: What Happens When a Home on the Market Gets Hit By a Tornado

What happens when the house you are selling or buying gets hit by a tornado?

The answer is—it depends. Claims adjusters are good an handling claims on a case by case basis, so if the home is totally destroyed and it’s a short sale or otherwise literally or figuratively underwater, the insurance money can be used only to rebuild, not to pay off a mortgage. The only exceptions are when a local government won’t allow construction.

Sellers still own and are responsible for the home until the moment of closing. If the home is damaged or destroyed the night before all the papers are signed, the sellers and their insurance company must cover the costs. Standard purchase agreements contain a provision that allows the buyer to back out without penalty in the event that their dream home becomes a pile of rubble. This is true even if the home is a short sale.

If the tornado (or fire, or earthquake, of nuclear meltdown) damages or destroys the home at any time after the closing, the buyer is responsible. This is one reason that mortgage lenders require that homeowners bring a prepaid insurance packet to the closing. If anything happens, they don’t want to lose the collateral on the mortgage.

Homeowners’ insurance will usually pay the costs to clear away the debris and rebuild, using the most up-to-date materials and workmanship in order to meet current codes. Land, which is not insured, almost always retains its value.