If your home hazard insurance is canceled, you may risk losing your mortgage. Once you no longer have home insurance at least equal to your outstanding mortgage balance, you are legally in violation of the terms of your loan. Depending on the language in your loan note, you may be in default, permitting the lender to foreclose. In most cases, your mortgage lender will take a less disastrous, but equally annoying, action.
Home Hazard Insurance Required
If you have a mortgage on your home, keeping the property insured for an amount equal to or greater than your loan balance is required. The only typical exception to this rule occurs if you own a small waterfront property, wherein the land, which cannot be insured, has a much greater value than your house structure. Your lender must protect its collateral to ensure that a hazard loss will not destroy the security it has for the mortgage loan, so it requires such insurance.
Mortgage Loan Provisions
Depending on the language in your mortgage loan note, your lender will have specific "remedies," should your home no longer have insurance protection. Some lenders, such as FHA, also require a "replacement" feature or addendum on the insurance policy that provides for replacement of the damage to the property regardless of the then-current cost. Having a replacement cost feature ensures that your home can be repaired, regardless of price increases in labor or materials, and restored to its former condition.
Many mortgage loan notes contain language that says that should you not have an active hazard insurance policy on your home, the loan goes into default. Unless you are delinquent on your mortgage loan, lenders usually do not enforce their rights to foreclose or demand to be paid off. Examine your mortgage note language to learn if your loan goes into default once it becomes uninsured. If your insurance is canceled, immediately replace it to avoid facing any consequences from a loan default.
Common Lender Actions
Even if a mortgage default clause does not appear in your note, most lenders will take another action. They will purchase insurance for you -- to protect their collateral. They will then add the cost of this insurance to your monthly mortgage payment amount. While this may sound convenient, the cost of hazard insurance your lender purchases could be up to five times the cost if you purchased coverage yourself, according to a recent Huffington Post article. Lenders typically take this action immediately, as soon as they receive a cancellation notice.
- Federal Title: Hazard Insurance Requirements
- Consumer Financial Protection Bureau: Force-Placed Hazard Insurance by Lender
- PNC Mortgage: Insurance FAQs
- Huffington Post: Fleecing of American Homeowners: Lender Force-Placed Insurance
- New York Times: When the Lender Buys Your Home Insurance, a Call Is in Order