A client who was trying to get a lapsed mortgage reinstated recently asked me: “What happens with my homeowner's insurance if I've stopped paying my mortgage.” Well, if your mortgage payments had homeowner's insurance built into it, then it's likely the policy was paid in advance, and you will owe the bank that money when bringing the mortgage up to date. But if your policy lapses, because for instance, you secured homeowner's insurance independently and failed to make the monthly payments on it, the servicer or bank will step in. It's not that they are trying to do you any favors, though. The bank is trying to protect their own interest in the property. And this “force-placed insurance” could cost you more than you expect.
Force-placed insurance is hazard insurance that a servicer obtains on behalf of the owner or assignee of a mortgage loan, that insures the property securing that loan. If the owner has failed to secure adequate homeowner's insurance, or has let a policy lapse, the mortgage-lender will obtain insurance for the property.
Unfortunately for the homeowner, it's common for force-placed insurance to be much more costly than a standard policy – often double the cost. The bank isn't concerned with shopping around for the best deal. They are concerned with protecting the asset immediately. Force-placed insurance companies will typically insure a property without taking the time to analyze or inspect it, so naturally they charge a higher standard premium.
To make things worse, the insurance policy force-placed by the bank might provide far less coverage than the policy that lapsed. Force-placed policies sometimes don't cover the full value of the property, and instead only provide coverage up to the amount owed to the bank. Remember, the bank is interested in protecting the structure of the home itself, not the contents or the homeowner's expenses. If a catastrophic hurricane were to severely damage your home, and your property was covered by insurance force-placed by the bank, it's likely that your belongings including clothing, furniture, and other valuables are not covered. Such a policy is also unlikely to cover expenses for temporary replacement (hotel or rental costs) while the home is being repaired.
The mortgage-lender has a legitimate interest and right in securing the property when the homeowner has not adequately insured it. But, for the homeowner who is already struggling to make mortgage payments, the extra cost of a pricey force-placed insurance chosen by the bank may be the straw that breaks the camel's back. Don't let exorbitant insurance premiums pile onto your debt, making it even harder to maintain your mortgage payments or bring arrears up to date. If your policy has lapsed, and your bank has force-placed insurance on your home, contact your old insurance carrier (or a new one) and get the insurance of your choice instated. Once a new policy is obtained, provide proof to your bank or mortgage lender and request that the insurance they put in place be cancelled immediately.
If you are behind in your mortgage and facing foreclosure, you may be unsure about what fees and penalties and costs may be required in order to reinstate your mortgage and keep your house. Keep the costs from getting out of hand and make sure that it's the insurance of your choosing that covers your home. Call Holland Law Group serving Florida from Miami County to Collier County to Alachua County, for a case review and evaluation.