We’ve all (semi) jokingly said, “I don’t own the house…the bank does.”
For those of us with a mortgage hanging over our heads, knowing this can be a sad reality of homeownership.
After all, the property isn’t truly yours until you’ve paid off your loan, assuming you ever do.
So one can certainly understand why a lender has the right to FORCE us to have property insurance while holding a mortgage; it protects their stake.
Heck, there are thousands of Americans leaving their homes simply because they’re underwater on the mortgage…even though the home is still in good shape.
So it’s not too hard to see why lenders wouldn’t count on us paying a mortgage on a home that’s been destroyed!
Enter lender forced, aka, lender placed property insurance.
When Would I Have Lender Forced Coverage?
Your lender has the option to “force” property coverage for your home if you do not take care of the insurance on your end.
Ultimately, your lender would be notified by your insurer if your property policy is cancelled. Perhaps you didn’t pay the insurance premium, or the policy was non-renewed for excessive claims activity.
Either way, the lender certainly isn’t going to take the risk of having no insurance on the property they technically own.
Most lenders will send you a letter if this happens, stating the type of coverage, the restriction it has versus a standard homeowners insurance policy, along with a strong recommendation that you try to find other (better) coverage.
What Exactly Is Covered and How Is It Different?
Lender forced coverage is typically a bare bones insurance policy that ONLY covers the actual structure in question.
These policies are generally much more expensive than purchasing insurance coverage in the standard market, e.g. direct from an insurer or through an insurance agent. You may see a premium that is double what you were paying prior to “losing” your original policy.
A standard homeowner’s insurance policy is a package of different coverage types. For example, a homeowner’s policy will offer liability coverage (typically $300,000 worth) and coverage for your personal contents.
There is no coverage for your liability or your home’s contents with a lender forced policy.
The lender could care less about your liability and your personal contents. Why? Because they have no insurable interest in those aspects of your life. Put simply, it doesn’t matter to them if you’re sued or if all of your “stuff” is destroyed in a tornado. The lender is only concerned with making sure the property they lent money on is covered.
What If I Don’t Want It?
Unless your mortgage is free and clear, you don’t have a choice regarding insurance. You either obtain a policy in the standard market or the lender will “find” a policy for you.
The cost of lender forced coverage is simply added to your monthly mortgage payment. Technically, you still don’t have to pay for it; but be prepared to deal with foreclosure proceedings if you don’t.
Not making the increased mortgage payment is the same as defaulting on the loan. They’ll take the house back and you’ll have a major red flag on your credit report.
Tip: Many insurers won’t give you credit for having previous home insurance if you had lender forced coverage prior to seeking a new policy.
Worst case scenario, you’ll be denied a new policy for not having continuous coverage on the property, and at the least, you may lose out on valuable discounts for having prior insurance. Either way, it is recommended you avoid lender forced coverage like the plague.
Contact you insurer or agent immediately if you receive a letter from your bank regarding forced coverage on your property. It is entirely possible an error was made somewhere along the line and your original policy may still be salvageable.