WEDNESDAY, NOVEMBER 18, 2020
You look in your mailbox and see a letter from your mortgage lender. You open it and discover your mortgage payment is going to increase by $100 per month because the lender has put mortgagee insurance (AKA “force-placed” insurance) on your home. WHAT?????
What is force-placed insurance? It’s an insurance policy that covers the mortgage lenders interest in a property. IF a mortgage lender has to buy this policy to protect its interest, it will charge YOU for the premium. It’s normally added to your mortgage payment. A lender uses force-placed insurance to ensure that their collateral (the property) is insured in the event there is property damage or loss so they get paid for the claim.
Here are the three most common reasons why a lender puts mortgagee insurance on your home:
1. You do not have a property insurance policy, either because you did not purchase a policy OR the policy is cancelled.
2. The lender has not yet received proof of property insurance.
3. The amount of coverage, deductible or type of coverage does not meet the lender’s requirements (note- this situation happens far less often than #1 and 2).
We’ll talk about each of the three next.
Reason #1 a mortgage lender puts mortgagee insurance on your property: You don’t have insurance or your policy cancelled
Although it would be highly unlikely that the lender would allow the closing to happen without proof of insurance, I have seen a few situations where proof was not required to close the loan. HOWEVER, you can bet your bottom dollar that eventually proof WILL be required and when it doesn’t appear, they’ll purchase the force-placed insurance.
What about if you let the policy cancel for non-payment? Or how about it was cancelled by the insurance company due to repairs not being made? Or even for an increase in hazard? No insurance is no insurance, so again force-placed insurance is the answer here.
Note: Insurance companies aren’t real excited about insuring a property that doesn’t currently have any insurance on it, especially if you let it cancel or it was cancelled by the insurance company for cause, so it could be difficult to get a policy when you need it.
Reason #2 a mortgage lender puts mortgagee insurance on your property: Proof of current insurance has not been received
There could be a million reasons why this happened. Perhaps the loan was re-financed and someone forgot to tell the insurance company. Obviously if you re-finance with a DIFFERENT lender, then we need the new information to update the policy with the correct mortgage lender information so the proof is sent.
Perhaps the current mortgagee clause is incorrect- the address has changed and no one thought to tell the insurance company. Of course, they would never receive it.
Reason #3 a mortgage lender puts mortgagee insurance on your property: The insurance policy doesn’t meet their requirements
For example, perhaps the mortgage is for $200,000, but the current insurance policy only insures the house for $150,000. The lender may get squirrelly and require a policy that insures the $200,000 (this is a situation worthy of a separate blog post). So they take out a policy for the $200,000 and you get charged. Again, this reason happens far less than the previous two, but it’s certainly possible.
How does mortgagee insurance work?
For any of these situations, the lender will take out a mortgagee policy to cover its interest in the property. It’s SUPER important to note that the force-placed policy ONLY covers the dwelling. It does not cover outbuildings, personal contents and liability coverage. So don’t fall under the assumption that the mortgagee policy covers you too. It does not. If there’s a fire, and your personal items are destroyed, you’re out of luck. If someone gets hurt on your property, you’re also out of luck.
Here are possible solutions to the three situations noted above…
Solution #1- You don’t have insurance or your policy cancelled
If you have a relationship with an existing insurance company or agent (say for other types of insurance), start there. Explain your situation- why no insurance or why the policy cancelled. Depending on the circumstances and your current relationship, it is possible that something can be done. Honesty really is your best policy here- if you fully explain your situation, then there’s a better chance you can get a policy. And any standard homeowners policy is FAR less expensive than a mortgagee policy. PLUS, you get your personal items and liability covered too.
If you don’t have a current relationship with an insurance agent/company (hint, hint ;), then you’ll have to contact others, but again, be honest in your explanation. Unless they know the situation, it’s impossible to know if you can be helped.
Solution #2- Proof of current insurance has not been received
99% of the time this is simply a matter of updating the existing mortgagee information. If the mortgage has been re-financed with a different lender, then your agent or insurance company needs that information to update the policy so the proof of insurance can be sent.
Or perhaps the current mortgagee has changed the mailing address. If we don’t know, we can’t change it (and we can’t send the necessary proof).
With most of these changes, notification from the lender is sent to you, someway, somehow. WE NEED THAT INFORMATION.
A simple phone call to your insurance company or agent will usually solve the problem. We’re pretty sure you don’t want to pay your regular homeowners insurance premium PLUS a mortgagee insurance premium (which is usually HIGH).
Solution #3- The insurance policy doesn’t meet their requirements.
This could be one of many things. A phone call to the lender to find out EXACTLY the problem with the current insurance would be the recommended solution. Depending on the reason, it might be easy to solve or more difficult. And then once you know, contact your insurance company or agent to discuss solutions.
These are the most common reasons why your mortgage company put mortgagee insurance on your home. If you have a relationship with an insurance company or agent, start there for a solution. And if you don’t or don't have the relationship you want? Then it’s time to start. We can help with many types of insurance, including homeowners insurance. Call us at 937-592-4871 or request your quote TODAY!
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