What if My Lender Finds Out I Don't Have Home Insurance?
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When you pay a home mortgage, you don't yet own the home. It belongs to the lender with whom you have a contractual relationship. Not only are you paying a set amount each month towards ownership, but you are also actively maintaining insurance coverage on the mortgaged home. In some cases, you may be unaware that you have homeowners insurance because the lender took out a policy on your behalf and payments are included in the monthly payments. However, if you do not have homeowners insurance through your lender and your lender finds out, they will likely put force-placed insurance on your home. It's well within their rights to also foreclose on the property because you are, by default, violating the terms of your mortgage loan.
It's best that you find out if you're covered right away. If you're not, compare home insurance rates to see who has the best coverage for you at the right price.
What Is Force-Placed Insurance?
Force-placed insurance (also called lender-placed, creditor-placed or collateral protection insurance) is a type of hazard insurance policy placed on your home by a mortgage lender or bank on your behalf if you have insufficient, lapsed or canceled homeowners' insurance. Force-placed insurance protects the lender's financial interests and is often more expensive than standard home insurance and with fewer protections for the homeowner.
You can avoid force-placed insurance if you meet or exceed the minimum insurance requirements throughout the term of your mortgage agreement. This is why it's vital that you make payments on time, keep your claims history clean, and don't file unnecessary claims. Otherwise, you may pay exorbitant rates for basic home insurance or even worse, you won't be able to get any homeowners insurance, potentially causing you to foreclose on the home. That's why it's essential to have the best home insurance in place and safeguard that account.
How Does Force-Placed Insurance Work?
Force-placed insurance protects the lender by covering the amount due on the mortgage or loan. In some cases, there is a replacement coverage option if the property is destroyed due to a covered peril, like fire. If the house is damaged or destroyed, the lender files a claim as they would with regular homeowner insurance. Typically, force-placed policies offer basic protection that covers the amount left on the mortgage. For instance, it probably won't cover your belongings.
Which Types of Insurance Can Be Force-Placed?
Force-placed home insurance: Different from mortgage insurance, force-placed homeowners insurance only offers a limited level of protection for your home, i.e. the structure of your home. It generally does not cover your private property or liability, which a homeowners insurance does.
Force-placed flood insurance: Your bank or lender may require you to purchase flood insurance for your property, especially if you live in a flood-prone area. Failure to do so may result in being force-placed into a flood insurance policy at your expense.
Force-placed car insurance: This lender-placed insurance policy is required if the driver cannot show proof of car insurance coverage or if their car insurance coverage does not meet the lender's requirements. Being subjected to force-plated auto insurance means you generally have no say in the coverage or cost.
What Do I Need to Know About Force-Placed Insurance?
It's important to note that with a force-placed insurance policy, you're likely paying too much. Most lenders have a vested interest in these policies to protect themselves — and sometimes for the wrong reasons. Since your home is technically owned by the lender or bank, they have the legal right to purchase a homeowners insurance policy and have you pay for it if they decide you do not carry a sufficient amount of insurance. Regardless of why your lender decides you need additional coverage — your home should never be unprotected for even a single day.
Bear in mind that your lender has to have done a reasonable amount of due diligence to show why they believe the borrower failed to obtain adequate insurance coverage as required by their mortgage agreement. There is a certain amount of protection for homebuyers to avoid force-placed insurance.
Another thing to remember about lender-placed insurance is that it often doesn't provide adequate coverage for the loss or damage of your personal items or owner liability. Its singular focus is on the home, not its contents or your legal battle. Homeowners insurance would cover you if someone trips and falls and ends up suing you for breaking an ankle — or if your dog bites the neighbor's child. As a homeowner, there are a whole host of home-related catastrophes you need to be prepared to protect yourself against.
Why Should I Not Let My Lender Choose My Home Insurance?
No matter how good your relationship with your lender may be, few people are as interested in getting you a fair homeowners insurance rate as you are. Concerns have been raised over the growing use of lender-placed insurance because the lender chooses the coverage provider and amount, as well as the coverage and limits, which may be more self-motivated than it is beneficial for the homeowner. You are your best advocate, so it's vital that you compare homeowners' insurance quotes for yourself.
What To Do if Your Lender Has Force-Placed Insurance on Your Home
Even though you may be paying more than twice as much as you should for homeowners insurance, you'll have to purchase a new home insurance policy before canceling the one placed on your property by the lender. You cannot have a lapse in insurance, and your lender will not be happy to hear that you plan to be uninsured for even an hour. If your old carrier drops you, do everything in your power to get homeowners insurance right away, even if you're turned away. Buy from a surplus line insurance. You may be paying more than you'd like, but it'll still be cheaper than any forced-placed insurance your lender might choose. If you cannot get another carrier, continue to make payments on the lender-placed policy. Otherwise, your home may be foreclosed.
How To Remove Force-Placed Insurance in 4 Steps
Lender-placed insurance is designed to protect lenders from risky financial exposure and as such are rarely ideal for borrowers. By following the correct steps, borrowers can get an existing force-placed insurance policy dropped and replaced with a cheaper and more comprehensive insurance policy.
Contact your lender, so you can figure out why you have force-placed insurance.
Buy a homeowners insurance policy that meets the limits required by the lender.
Send your lender proof that you have an active home insurance policy and request to cancel the force-placed insurance policy as soon as possible.
Make sure you get a letter of cancellation from the lender stating that the forced-placed policy has been dropped.
No matter why your lender has determined to purchase force-placed insurance on your home, you should continue paying the bill until the issue is resolved. Otherwise, you could be in violation of the terms of your mortgage loan and may lose your home.
Reasons Why You May Not Get Homeowners Insurance Coverage
Insurers consider different factors when issuing a policy, including how old the home is, its location and more. They avoid writing high-risk policies to protect their own financial investment. Some factors that can result in a high-risk application include:
Poor credit: Poor credit shows that you don't make payments on bills on time and in full. Insurance companies are hesitant to take on clients who may allow their coverage to lapse.
High-risk area: If your home is situated in or near a floodplain, sinkhole, wildfire-risk area or earthquake-prone region, you may have a hard time getting home insurance.
Fraud: If you've filed fraudulent claims in the past, you'll have a hard time buying insurance. You may have to have a spouse or someone else living in the home take out a policy.
Too many claims: If you've filed numerous claims in the past, insurance companies will and can refuse you. This is why it's vital to only file claims you cannot afford on your own.
High-crime zone: It'll be hard to find a carrier if your home is in a high-crime area.
Old homes: Older homes are risky to insurers, so you may pay a very high price or not be able to insure at all. If you can update building codes, it may help.
Unpermitted additions: You can't insure something that's technically unlawful.
Dog breed: Certain dog breeds are known to do a lot of damage or have shown aggressive behavior towards other animals and humans (including children). Insurers will not insure homes with potentially vicious pets and certain animals.
Avoid or Remove Force Placed Home Insurance
If your bank or lender requires home insurance as a condition of your mortgage, you'll be better off finding a policy that fits your lifestyle, budget and needs rather than paying for a force-placed policy, which is inadequate and costs more than a standard home policy.
Let SmartFinancial shop for you and match you with the cheapest insurers in your area. All you need to do is answer a few questions to get pricing on the right type of policy for your home. Enter your zip code below and fill out our easy questionnaire to get started.