Your Mortgage, Your Homeowners Insurance and Forced Placed Coverage
When you take out a mortgage, part of the agreement is that you will purchase adequate homeowners insurance coverage. Adequate coverage usually means that you are insured for the replacement of your home to 100% of replacement value or that your home has enough coverage to address the amount of the loan. While the latter may mean that the mortgage company wants enough coverage to pay the outstanding loan balance, most homeowners policies do not cover the loan amount, just the rebuilding of a home. In a nutshell, the mortgage company wants to make sure that they are protected if your home suffers an insurable loss such as fire or water damage. If you are in a flood zone, they will require you to get separate flood insurance, as regular homeowners policies exclude damage caused by flood and ground water.
Your mortgage company will, at a number of times, prompt you to provide proof of home insurance.
This typically happens when:
- Your first purchase your home; this will be done through your title company.
- At the annual renewal; however most homeowners policies automatically send the lender a copy of the renewal.
- When you refinance and there is a new lender, this is done by the title company.
- When a policy is cancelled, either at the renewal or for non-payment.
When you get a request, you should always forward the request, along with any instructions, to your homeowners insurance agent. If a title company is involved, you should always provide your agency information, phone number, fax and email address to the title company. If you are purchasing a new home, you should always contact your broker at least 3 weeks prior to make arrangements for a policy and notify your title company as soon as you can. Getting the request to your agency right away will allow for fewer problems and a quick resolution to complying with your homeowners insurance requirements.
Should there be any gap in your homeowners insurance, the mortgage company will force place
coverage on your home and have the right to do this since it is in the mortgage agreement. This
forced placed coverage is usually very expensive and more likely than not will protect the mortgagee's interests, not your interests. The bottom line is, the coverages are probably very basic, will probably not protect you to the degree a regular homeowners policy would protect you and probably does not include liability insurance. The reason why these policy premiums are very expensive is the policy is not underwritten, and because of this there may be an assumption that you cannot get coverage on your own and that your property may be high risk.
To avoid this expensive forced placed coverage, attend to your lenders homeowners insurance
requirement right away. Even if you have a three-day gap in your homeowners insurance, they can still come back and charge you for those three days, and it's not cheap. Your agent is here to help you avoid things like this from happening. Maintaining good communication, either via email or phone, is the key for things to go as smoothly as possible.
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