How Climate Risk Could Impact Your Mortgage Eligibility
Climate change is no longer just an environmental issue—it’s becoming a financial one, especially for potential homeowners. A recent report from First Street, a climate risk modeling firm, reveals that rising risks from natural disasters may soon play a key role in determining mortgage approvals and even credit scores.
Traditionally, credit scores are calculated based on financial history—things like debt, payment behavior, and income stability. But this conventional system overlooks an increasingly crucial factor: exposure to climate-related threats such as flooding, hurricanes, and wildfires. First Street’s analysis highlights that as extreme weather events grow in frequency and severity, the housing market—and those seeking to enter it—could face a financial shake-up.
Climate Disasters Could Influence Your Creditworthiness
The report shows a clear connection between areas prone to natural disasters and an increased rate of mortgage defaults. In simple terms, buyers who invest in homes at high climate risk may be more likely to miss payments or lose their homes, creating significant losses for lenders. Yet, this climate exposure remains mostly absent from credit evaluations today.
If climate risk were factored into mortgage decisions, it could change the game for both buyers and lenders. Homebuyers might find their creditworthiness downgraded simply because they plan to purchase a home in a disaster-prone region. On the flip side, those choosing safer zones could benefit from better loan terms.
Billions at Risk: Lenders Face Growing Losses
Lenders are also facing growing pressure. As weather-driven foreclosures rise, so do their financial losses. First Street estimates that these foreclosures already cost lenders $1.2 billion annually. That number could climb to $5.4 billion per year by 2035, with California, Florida, and Louisiana accounting for the majority of those losses.
The causes? Skyrocketing home insurance costs and more frequent climate catastrophes. Insurance companies are pulling out of high-risk areas, and the ones that stay are increasing premiums dramatically. For example, California homeowners are seeing double-digit rate hikes, largely due to wildfire damage.
Without affordable insurance, homeowners are left financially exposed. A flood or fire without proper coverage can lead to bankruptcy, missed payments, and, eventually, foreclosure. This growing trend puts added strain not only on families but also on the entire financial system.
Wider Financial Fallout and a Warning for Homebuyers
Jeremy Porter, who leads climate impact research at First Street, warns that when climate shocks hit a community, the consequences spread. “It’s not just about individual homes anymore,” he notes. “These events raise mortgage rates and disrupt entire markets. They can make homeownership unreachable for many.”
Porter’s study also uncovered another alarming trend: flood risk outside of FEMA flood zones. Homes affected by floods in areas not officially marked as flood zones experience a 57% higher foreclosure rate compared to nearby unaffected properties. Since these homeowners are unlikely to carry flood insurance, they’re more vulnerable when disaster strikes.
The research team also found a correlation between rising insurance costs and higher foreclosure rates at the ZIP code level. As premiums surge, some households can no longer keep up with both their mortgage and insurance payments—putting them and their lenders at greater risk.
Final Thoughts: Climate Change Is Rewriting Financial Rules
One concerning factor in the future of climate-related financial tracking is data availability. Historically, the National Oceanic and Atmospheric Administration (NOAA) maintained a comprehensive list of billion-dollar disasters. But with recent budget cuts, NOAA has paused updates, leaving analysts to rely on alternative, possibly less accurate, data sources.
The takeaway? Climate change isn’t just reshaping the environment—it’s redefining financial stability. As natural disasters grow more frequent and costly, buyers, lenders, and insurers alike may need to adopt new strategies that factor in environmental risk. For future homeowners, understanding and adapting to these changes may become just as important as maintaining a good credit score.
