A mortgage lien binds repayment of a home loan to your home's ownership. By entering into a mortgage agreement, you give a lien holder the right to take ownership through foreclosure and sell your property to recover losses in the event you fail to repay the debt. Because the lien holder has a claim to your house until you pay off the loan, it requires you to maintain homeowners insurance, and in certain cases, the lien holder can obtain it on your behalf.
Ins and Outs of Liens
A lien holder has a claim to real estate that it can enforce to recover payment for a loan. A lien holder may be an individual or a lending institution. When you buy or refinance a home, you typically use the property as collateral to get financing from a bank or mortgage lending company. You must pay off an outstanding home loan, known as a mortgage lien, for the lien holder to relinquish its claim to your property.
Protecting Valuable Asset
You obtain homeowners insurance to safeguard not only your investment, but the lien holder's also. Homeowners insurance coverage can repair a home's components or replace the entire structure due to specific disastrous events, such as fire, storms and certain inclement weather, and faulty mechanical systems. There are various types of homeowners insurance policies with a range of protection. An institutional lien holder requires you to obtain a minimum amount of coverage to protect its financial interests in your home and may also require that it's named as a beneficiary on the policy.
Hazards of Not Having Insurance
Your failure to carry adequate homeowners insurance coverage may prompt the lien holder to purchase a policy on your behalf. Known as "force-placed" insurance, it can be more comprehensive and more expensive than your previous coverage. Because the lien holder makes proper coverage a condition of financing, it has the right to impose a preferred policy if you fail to maintain your own. Lien holders may force-place insurance if you default on the mortgage and allow the policy to lapse, the insurance company cancels your policy, or if you otherwise stop carrying sufficient coverage.
Lien Holder Makes You Pay
Although the lien holder selects the homeowners insurance provider, the coverage and amount, the borrower must pay the bill. If you have an escrow account in which you pay property taxes and insurance along with your mortgage payment each month, the lien holder can increase the required escrow payment to recover the difference between your previous homeowners insurance premium and the force-placed premium. If you don't have an escrow account, the lien holder can force you to establish an escrow account to ensure that you continue paying for the insurance.
- Michael Blann/Digital Vision/Getty Images