Why climate risk could affect your credit score for buying a home

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Climate change should be considered a new core aspect of creditworthiness when prospective home buyers apply for a mortgage, a new report suggests.

The analysis from the climate risk financial modeling firm First Street is a groundbreaking nationwide look at the ties between the growing risks from extreme weather such as floods and wildfires, and a long-suspected spike in mortgage defaults in hard-hit areas.

It finds that lenders and borrowers are exposed to more financial risk than they are aware of because current ways of determining creditworthiness leave out exposure to climate disasters as a factor.

If climate risk were to be taken into account by lenders — which the analysis shows may be increasingly necessary as climate change worsens the severity and frequency of certain extreme weather events — then the next time someone goes to get a home loan their credit score could be knocked down (or adjusted upward) due to their climate risk exposure.

At the same time, mortgage lenders could become more hesitant to provide policies, or raise the cost of borrowing, in certain risky areas with greater exposure to climate-related hazards.

First Street finds weather-driven mortgage foreclosures could cause $1.2 billion in lender losses in today’s climate, with the majority of that happening in just three states: California, Florida and Louisiana.

Over the next decade, this could increase to up to $5.4 billion per year by 2035, which would be about 30% of annual lender losses, the report says.

“This growing share of foreclosure losses is largely driven by the escalating insurance crisis and the increasing frequency and severity of flooding anticipated in the next decade,” the report states.

In pictures: Hurricane Helene unleashes its fury 69 photos A person walks into floodwaters to assist a stranded driver on the outskirts of Boone, North Carolina, on September 27. Jonathan Drake/Reuters In pictures: Hurricane Helene unleashes its fury A person walks into floodwaters to assist a stranded driver on the outskirts of Boone, North Carolina, on September 27. Jonathan Drake/Reuters Martika Stansell and two of her children help pile debris in front of their flooded house in Canton, North Carolina, on October 3. Jonathan Drake/Reuters Helicopters use a field in Swannanoa, North Carolina, as a landing zone to ferry supplies and crews to areas made inaccessible by Helene. Erik S. Lesser/EPA-EFE/Shutterstock A man helps clean out a home’s flooded crawlspace in Cruso, North Carolina. Jonathan Drake/Reuters A residential area is flooded in Swannanoa on October 3. Eduardo Munoz/Reuters A relief group climbs up the side of a hill as they help near Bat Cave, North Carolina, on October 3. The group was tasked with clearing roads and checking on people isolated because of Helene. Sean Rayford/Getty Images Volunteers load supplies at Ridgeline Heating and Cooling, which was turned into a relief area and community coordination center in Bills Creek, North Carolina. Allison Joyce/AFP/Getty Images A police car is stuck in mud in a flooded area of Lake Lure, North Carolina, on October 2. Allison Joyce/AFP/Getty Images Homes are damaged in Chimney Rock, North Carolina, on October 2. Mike Stewart/AP People help run a volunteer local community care center in Barnardsville, North Carolina. Jonathan Drake/Reuters A marina is filled with debris in Lake Lure on October 2. Mike Stewart/AP Emily Ogburn, right, hugs her friend Cody Klein after he brought her a meal in Swannanoa on October 2. Melissa Sue Gerrits/Getty Images Friends help Sam Soughail, third from left, clear out his Casablanca Cigar Bar in Asheville, North Carolina, on October 1. Melissa Sue Gerrits/Getty Images Van Hutchins, right, hands Dennis Rector a family photo album that survived the flooding of his wife’s business, the Penland & Sons Department Store, in Marshall, North Carolina. Josh Morgan/USA Today Network/Imagn Images Power line poles lean in Lake Lure on October 1. Jonathan Drake/Reuters A search-and-rescue team looks for victims in deep mud in Swannanoa. Mike Stewart/AP Andy Brown takes a break on top of what remains of a tree that destroyed his SUV in Augusta, Georgia. Jeffrey Collins/AP Len Frisbee dumps a wheelbarrow of dirt as he helps with cleanup in Hot Springs, North Carolina, on October 1. Jeff Roberson/AP People evacuate by foot on Highway 64, near Bat Cave, on September 30. Christian Monterrosa/The New York Times/Redux A helicopter flies near damaged buildings in Bat Cave on September 30. Marco Bello/Reuters Linda Bandy, left, and Carissa Sheehan clean up inside the International Moulding frame shop in Morganton, North Carolina. Kathy Kmonicek/AP Janice Whitley hands her brother Terry Wilson some salvaged items while they remove valuables from their flooded home in Old Fort on September 29. Melissa Sue Gerrits/Getty Images People wait in line to access gasoline in Fletcher, North Carolina, on September 29. Sean Rayford/Getty Images Melinda Segassie wheels possessions she salvaged from her home in Steinhatchee, Florida. Kathleen Flynn/Reuters This home in Tampa, Florida, was destroyed by fire during the storm. Paul Hennessy/Anadolu/Getty Images Workers clean and gut a flooded property in Steinhatchee. Gerald Herbert/AP Meta Gatschenberger surveys the remains of her collapsed house in Boone on September 28. Jonathan Drake/Reuters Floodwaters are seen in Asheville in this image released by the North Carolina Department of Transportation on September 28. North Carolina Department of Transportation People gather at a fire station to access Wi-Fi after Helene moved through Asheville. Melissa Sue Gerrits/Getty Images People inspect flood damage in Asheville on September 28. Sean Rayford/Getty Images An area of Asheville is flooded on September 28. Melissa Sue Gerrits/Getty Images Elmira Glover sits on her porch after taking the first look inside her home, which had been completely flooded in Steinhatchee. Kathleen Flynn/Reuters Boats displaced by Hurricane Helene sit in front of homes in Treasure Island, Florida, on September 28. Joe Raedle/Getty Images Light filters into a room of a home that was destroyed by the hurricane in Horseshoe Beach, Florida. Marco Bello/Reuters Customers crowd a supermarket aisle for bottled water after widespread damage disrupted water supplies in Boone. Jonathan Drake/Reuters Buildings are left damaged by the storm in Valdosta, Georgia, on September 28. John Falchetto/AFP/Getty Images People walk among debris from their family’s beach house in Horseshoe Beach. Marco Bello/Reuters The Laurel Fork Road bridge is destroyed by floodwaters in Vilas, North Carolina, on September 27. Jonathan Drake/Reuters Cassandra Randall, right, is hugged by Jessica Downey inside a damaged Maddie’s grocery store in Steinhatchee on September 27. Greg Lovett/The Palm Beach Post/USA Today Network People work on power lines after Hurricane Helene passed offshore in Crystal River, Florida, on September 27. Joe Raedle/Getty Images Hailey Morgan, right, surveys the damage to her flooded home after returning with her children, in the aftermath of Hurricane Helene, in Crystal River on September 27. Phelan M. Ebenhack/AP An aerial view shows a flooded and damaged area following Hurricane Helene in Steinhatchee on September 27. Marco Bello/Reuters People use buckets to remove water from a home near Peachtree Creek in Atlanta on September 27 after Hurricane Helene brought heavy rain overnight. Megan Varner/Getty Images Sarah Cribbins and her son, Michael, cuddle their dog after being rescued from floodwaters in Crystal River on September 27. Luis Santana/Tampa Bay Times/AP Debris is seen inside a Cedar Key, Florida, store on September 27. Miguel J. Rodriguez Carrillo/AFP/Getty Images A tree crew cuts up large limbs that fell on East 49th Street in Savannah, Georgia, on September 27. Richard Burkhart/Savannah Morning News/USA Today Network An American flag sits in floodwaters in the Shore Acres neighborhood of St. Petersburg, Florida, on September 27. Mike Carlson/AP A tree lies on a house in Valdosta on September 27. Mike Stewart/AP Candice Ocvil, left, and Jibri Tolen, right, row through floodwaters in Atlanta on September 27. Erik S. Lesser/EPA-EFE/Shutterstock The aftermath of Hurricane Helene is seen in Cedar Key, Florida, on September 27. Cristobal Herrera-Ulashkevich/EPA-EFE/Shutterstock Candace Redwine surveys the damage after about 3 feet of water inundated her Spiceman Kitchen store in Tarpon Springs, Florida, on September 27. Joe Raedle/Getty Images Flood water washes over Guy Ford Road bridge on the Watauga River in Sugar Grove, North Carolina, on September 26. Jonathan Drake/Reuters In this screengrab taken from a United States Coast Guard body cam , a man and his dog are seen being rescued after his sailboat became disabled and started taking on water off Sanibel Island, Florida, on September 26. United States Coast Guard/Reuters Cars drive over the George G. Tapper Bridge before Hurricane Helene makes landfall in Port Saint Joe, Florida, on September 26. Ricardo Arduengo/AFP/Getty Images Guests put on ponchos at Walt Disney World in Bay Lake, Florida, on September 26 as Hurricane Helene began bearing down. Joe Burbank/Orlando Sentinel/Tribune News Service/Getty Images Carol Poulson uses her phone to document the impacts of Hurricane Helene as it builds offshore in St. Petersburg on September 26. Joe Raedle/Getty Images A man walks through a flooded Times Square area of Fort Myers Beach, Florida, on September 26. Andrew West/The News-Press/USA Today Network/Imagn Images Cynthia Centeno, a Tallahassee resident, sits with her family inside a hurricane evacuation shelter at Fairview Middle School in Leon County, Florida, on September 26. Gerald Herbert/AP Waves impact a house seawall in Eastpoint, Florida, on September 26. Marco Bello/Reuters Charles Starling, a lineman with Team Fishel, walks by a row of electrical line trucks staged in a field in The Villages, Florida, on September 26. Stephen M. Dowell/Orlando Sentinel/Tribune News Service/Getty Images People work at the State Emergency Operations Center in Tallahassee, Florida, on September 26. Chandan Khanna/AFP/Getty Images A man crosses a flooded area on the coast of Gulfport, Florida, on September 26. Thomas Simonetti/The Washington Post/Getty Images Cars drive through a flooded street in St. Pete Beach on September 26. Joe Raedle/Getty Images Hurricane Helene is seen in a satellite photo on September 26. NOAA A woman fills up a container with gas ahead of Helene’s landfall in Cross City, Florida, on September 25. Marco Bello/Reuters People in Guanimar, Cuba, traverse a flooded street in a boat on September 25. Ramon Espinosa/AP A Wakulla County firefighter speaks to residents of Panacea, Florida, while making note of those who were not evacuating on September 25. Sean Rayford/Getty Images Storm damage from Helene is seen in Puerto Juarez, Mexico, on September 25. Paola Chiomante/Reuters People fill up sandbags in Clearwater, Florida, on September 25. Marco Bello/Reuters Prev Next In pictures: Hurricane Helene unleashes its fury

It is well-known that the cost of home insurance is increasing in many areas due in part to climate change-driven hazards. This is causing insurance policies to become unaffordable for many people, which exposes them to financial risk from a flood, wildfire or hurricane, for example.

It is also prompting insurance companies to flee particularly disaster-prone locations, such as Florida and California. In California, State Farm is raising rates by 17% in one year due in large part to wildfire-related losses.

“When climate events destabilize local housing markets, it doesn’t just affect those directly hit,” said Jeremy Porter, head of climate implications for First Street and an author of the report.

“It ripples through the financial system, driving up mortgage rates, directly impacting individual credit risk, and pricing more people out of homeownership,” Porter said.

Relying on a combination of peer reviewed methods and new techniques, Porter looked at the number, amount and pattern of foreclosures following wildfire, extreme wind and flooding events nationally. He found the best predictor of rising foreclosure rates among climate-related factors is flooding, particularly when it occurs outside of FEMA flood zones, where homeowners are far less likely to have flood insurance.

The study also linked rapid increases in insurance premiums over time at the ZIP code level to increases in foreclosures in those same ZIP codes, finding that insurance increases are putting many families in a more financially vulnerable position and creating greater risks for lenders.

Properties flooded in an extreme weather event face a 57% higher foreclosure rate than nearby, unflooded homes, Porter said.

One underlying trend used for the study is the rapid increase in costs of natural disasters in the US, as shown in the National Oceanic and Atmospheric Administration’s billion-dollar weather and climate disaster database.

However, the agency recently announced that due to staffing cuts and shifting priorities, it will no longer update this list, forcing groups like First Street to rethink their methodology and rely on other, potentially inferior datasets.