The U.S. Small Business Administration (SBA) provides loans to homeowners, renters, nonprofit organizations, and business owners to help rebuild a home, replace belongings, or repair a business, among other things, after a natural disaster. But if you put up real estate as collateral for the loan and later default, like by failing to make the payments, the lender might foreclose.
Read on to learn more about SBA loans for disaster relief and foreclosure of these loans.
The SBA offers low-interest, fixed-rate loans to those who've suffered damage as a result of a natural disaster.
You can use disaster loan proceeds only for restoring or replacing your primary home (including a mobile home that's used as a primary residence), your personal property, or business property.
You must use the money to bring the property as close as possible to its pre-disaster condition, and within certain limits, to protect damaged or destroyed real property from potential future similar disasters. (13 C.F.R. § 123.7).
SBA disaster loan assistance comes in the form of:
(To learn more about these loan programs, see Getting an SBA Loan After a Natural Disaster.)
The SBA might issue the disaster loan itself or the loan might come from a participating lender. If you get your loan directly from the SBA, then the SBA will service (manage) the loan. But if you take out the loan from a participating lender, that lender is responsible for servicing your loan. (13 C.F.R. § 123.16).
Because SBA disaster assistance is disbursed in the form of loans—not grants—borrowers must agree to pay the money back. For some SBA disaster loans, borrowers have to provide collateral for the loan. (13 C.F.R. § 123.11).
So, a borrower might have to allow the lender to place a lien on the damaged home or on replacement real estate. Or the lender might require the borrower to give the lender a security interest in personal property. (The lender could also require a lien on both real estate and personal property.)
If the borrower defaults on the payments for a disaster loan that's secured by the borrower’s home or other real estate, the lender could potentially foreclose. The foreclosure will be either judicial or nonjudicial, depending on state law and whether or not the mortgage contract has a provision granting a power of sale.
However, SBA servicing guidelines say that a workout (an alternative to foreclosure) should be negotiated whenever possible and many different options are available. For instance, if you’re not able to make your SBA loan installments in a timely manner for reasons that are substantially beyond your control, you may request that the SBA suspend your loan payments or extend the loan maturity date (or both) to give you with some relief. (13 C.F.R. § 123.16).
Also, under SBA servicing guidelines, if you’re facing a severe hardship, you might be able to get (for example) a deferment of past or future payments of principal, interest, or both for a stated period of time. Or you might be able to get a reduction in the interest rate, payment amount, or frequency of payments.
Another potential option is an "offer in compromise" where the borrower offers to pay less than what's owed to fully satisfy the debt.
If you’re facing a possible foreclosure due to nonpayment on an SBA disaster loan, consider talking to a local foreclosure attorney to learn about different options for your situation.
If you’re behind on payments for a mortgage that you already had when the disaster hit, see Help for Homeowners Facing Foreclosure After a Natural Disaster to learn about foreclosure relief after a natural disaster.